With more than 1,800 exchange-traded funds (ETFs) currently on the market, investors can experience paralysis when it comes to choosing the right funds for their portfolio. Leveraged ETFs comprise a small fraction of the available ETFs—and with good reason. These are highly complex investment vehicles with a high-risk, high-cost structure, that's suitable only for experienced investors with a high risk tolerance.

Key Takeaways

  • Leveraged exchange-traded funds are highly complex investment vehicles with a high-risk, high-cost structure, suitable only for experienced investors with a high risk tolerance.
  • Leveraged funds use debt to achieve returns that are typically two or three times that of the index they track.
  • These funds are not generally considered long-term investment options. In fact, most investors limit their exposure to a leveraged fund for a single day to just a few days.

Leveraged funds use debt to achieve returns that are typically two or three times that of the index they track. For example, a fund with a 2:1 ratio would match each dollar of investor capital with $1 of invested debt (via futures contracts or other derivatives), which in theory would double the return, less any management fees and transaction costs. If the index achieves a 1% gain, a 2:1 leveraged fund would return 2%. Of course, the opposite is also true: a 1% loss becomes 2% in a leveraged ETF.

These funds are not generally considered long-term investment options. In fact, most investors limit their exposure to a leveraged fund for a single day, to just a few days, in order to capitalize on a positive run of the underlying index.

It is important to note that these funds are rebalanced daily. Consequently, performance numbers may not closely track the long-term performance of the underlying index—in this case, the S&P 500. 

All year-to-date (YTD) returns are based on the period of January 1, 2017, through December 22, 2017. Funds were selected on a combination of performance and assets under management. All figures are as of December 22, 2017.

ProShares Ultra S&P 500 ETF (SSO)

  • Issuer: ProShares
  • Assets Under Management: $2.3 billion
  • YTD Performance: 44.98%
  • Expense Ratio: 0.90%
  • Dividend Yield: 0.33%
  • Price: $110.07

This leveraged fund seeks to double the return of the S&P 500 for a single day (from one NAV calculation to the next) using stocks and derivatives. The Fund pays a quarterly dividend. It trades at approximately $110 with a trailing 12-month dividend yield of 0.33%.

YTD through December 22, 2017, the Fund has returned 44.98% versus a return of 19.85% for the S&P 500. Its three-year annualized total return is 19.55%.

ProShares Ultra Pro S&P 500 ETF (UPRO)

  • Issuer: ProShares
  • Assets Under Management: $1.23 billion
  • YTD Performance: 72.56%
  • Expense Ratio: 0.97%
  • Dividend Yield: N/A
  • Price: $141.12

This ProShares ETF is similar to its sister fund (SSO), but UPRO aims for returns equivalent to 300% of the S&P 500 using swap contracts for leverage. Both funds are rebalanced daily, so multiplied returns may not exactly match the returns of the underlying index over the long term. 

UPRO trades at approximately $141. In 2017, the Fund had a YTD return as of December 22 of 72.56%. Its three-year annualized total return is 27.63%.

Direxion Daily S&P 500 Bull 2x Shares (SPUU)

  • Issuer: Direxion
  • Assets Under Management: $4.2 million
  • YTD Performance: 44.42%
  • Expense Ratio: 0.68%
  • Dividend Yield: 0.14%
  • Price: $49.82

SPUU is one of a series of leveraged ETFs offered by Direxion. The Direxion S&P 500 leveraged ETFs utilize swaps and futures contracts to achieve the targeted objective. This Fund seeks to replicate two times the performance of the S&P 500.

In 2017, SPUU had a YTD return of 44.42% as of December 22. Its three-year annualized total return is 19.55%.

Direxion Daily S&P 500 Bull 3x Shares ETF (SPXL)

  • Issuer: Direxion
  • Assets Under Management: $841.8 million
  • YTD Performance: 72.08%
  • Expense Ratio: 1.06%
  • Dividend Yield: N/A
  • Price: $44.60

This ETF is another leveraged ETF from Direxion. It seeks to produce three times the return of the S&P 500 on a daily basis. 

In 2017, SPXL had a YTD return of 72.08%. Its three-year annualized total return is 27.08%.