The Traderszone Network

Published in ETF's 23 April, 2009 by James McBride

Outperforming The Market: Is More Leverage Better?

Over the past year or so, leverage has been a key component in many new and top-performing ETF’s. Astute traders using leveraged and/or inverse funds have seen outsized gains compared to more traditional vehicles.

However, owning a leveraged or inverse ETF definitely won’t guarantee a profit. In fact, with leverage, if your underlying isn’t on any of the latest “hot” lists or pundit-promoted investment-of-the-week picks, there’s a good chance you could wind up disappointed. Or, if you’re a faithful adherent of the risk reduction philosophy, spending a long time fighting your way back to some type of profitability.

Leverage (TV series)

Part of the problem (and the benefit) of going for the super-sized returns that pumped-up inverse and leverage funds offer is that if you’re right, you can become wealthy—fast. But if you’re wrong, well, the inverse can happen, with a multiplier effect.

As new ETFs come out offering an ever-widening array of ways to deal with the markets, it’s going to become imperative that independent-minded traders understand the long-term implications of these vehicles. And that means putting into perspective how a well-rounded sector allocation will play out, employing robust risk-management (most likely longer-term puts and collars) and simply knowing what you’re buying and why you’re buying it.

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