An Exchange Traded Fund (ETF) is a kind of mutual fund that can be bought and sold at a quoted price during market hours in exactly the same way that you can buy and sell stocks. The “fund” part means that, behind the scenes, the ETF pools investments from many investors to buy several securities (e.g., all the FTSE 100 stocks). It differs from a traditional mutual fund because traditional funds can only be bought or sold once per day at that day’s price.
In this guide, we describe a special kind of ETF — a 3 x leveraged ETF — and we offer our top picks from the leveraged ETF pack.
What is a 3x Leveraged ETF?
Leverage means trading or investing with borrowed money, in the same way that you might invest in a house by putting down a £10,000 deposit and borrowing another £90,000 as a mortgage from a bank. In this example, you have 10x leverage, which amplifies your gains such that you notionally double your £10,000 “investment”(an increase of 100%) if the value of your house rises by just 10% from £100,000 to £110,000.
A three times leveraged ETF triples your returns. If the underlying market — let’s say the FTSE 100 index — rises by 10%, your investment increases by 30%. Except that it doesn’t. Not exactly, because of the way derivatives are used under-the-covers to achieve the leverage, which makes leveraged ETFs more useful over the short term for day traders rather than long-term investors.
One more word of warning about leveraged ETFs. They amplify your losses as well as your gains! So, you need to identify your risk tolerance and stick with it. And be especially careful about “short” ETFs which go down when the underlying market goes up, and vice versa.
Where Can I Trade 3x Leveraged ETFs?
Most broker accounts and other online trading platforms allow you to trade ETFs, and for some ETFs, this can include tax-efficient trading accounts such as a Stock & Shares ISA or Self-Invested Pension Plan (SIPP) in the UK.
Invest in 3x Leveraged ETFs in 3 Steps
Open a Trading Account
The first thing to do is to open an account with an online broker. Pay attention to commissions and look out for hidden charges like interest on margins (the borrowed money) or service fees for withdrawals. Also, take note of trading limits and minimum account balances.
Choose 3x Leveraged ETFs
Your broker’s online platform will display a list of the ETFs that you can buy, and some platforms will let you filter the list to find ETFs from a particular provider or with low fees.
Place Your Trade
When you’ve found the ETF you want, you can buy it from the broker in exactly the same way that you would buy a stock: at a quoted price during market hours or at a maximum price by placing a limit order inside or outside of market hours.
Best 3x Leveraged ETFs to Buy Now
Based on returns, total assets under management, and prevailing market conditions, we have selected our top 10 3x leveraged ETFs:
- ProShares UltraPro Short QQQ (SQQQ)
- Direxion Daily S&P 500 Bear 3X Shares (SPXS)
- ProShares UltraPro Short S&P500 (SPXU)
- Direxion Daily S&P Biotech Bull 3X Shares (LABU)
- Direxion Daily Semiconductor Bull 3X Shares (SOXL)
- Direxion Daily Retail Bull 3x Share (RETL)
- Direxion Daily Small Cap Bull 3x Shares (TNA)
- MicroSectors FANG+ Index 3X Leveraged ETN (FNGU)
- Direxion Daily Financial Bull 3x Shares (FAS)
- Direxion Daily Regional Banks Bull 3X Shares (DPST)
1. ProShares UltraPro Short QQQ (SQQQ)
SQQQ is a fund issued by ProShares, which offers three times leveraged daily short exposure to the Nasdaq-100 Index. Bearish investors can make speculative bets against the index through this fund. The total assets under management (AUM) for SQQ are $1.3 billion at the time of writing, with an annual dividend yield of 0.91%. This “short” fund is best during bear markets, and it lost a lot of value in the five years to 2021 because the market was bullish.
2. Direxion Daily S&P 500 Bear 3X Shares (SPXS)
SPXS is another 3x leveraged ETF for bearish markets. Issued by Direxion, the fund seeks a 300% daily return on short exposure to the S&P 500. The fund uses assets such as securities and swaps to achieve its 3x daily short leverage. The fund’s total AUM at the time of writing is $612.8 million.
3. ProShares UltraPro Short S&P 500 (SPXU)
SPXU is an inverse leveraged fund. Issued by Proshares, SPXU seeks daily returns that are three times the inverse (-3x) of the daily performance of the S&P 500. This implies the fund reflects three times the opposite performance of the index. The fund would be most profitable during bear markets. The fund has a total asset base valued at $657.47m at the time of writing. As with all short ETFs, it lost value during the long bull run.
4. Direxion Daily S&P Biotech Bull 3X Shares (LABU)
LABU seeks to make investment returns from 3x daily exposure to the S&P Biotechnology Select Industry index. The fund invests in derivatives contracts to leverage against the index's performance, which is rebalanced at the end of each trading session. The fund has a total AUM of $433.86M at the time of writing, and it has had a bumpy ride between 2020 and 2021.
5. Direxion Daily Semiconductor Bull 3X Shares (SOXL)
SOXL is a bullish fund that seeks to make investment returns from 3x daily exposure to the PHLX Semiconductor Sector index. SOXL uses swap agreements and futures contracts as leverage exposure to the index, which it rebalances daily. The total AUM of the fund is $2.01bn at the time of writing. It took a big dip in March 2020 due to the coronavirus pandemic but then bounced back even higher as the underlying assets bounced back.
Expert Tip on Investing in 3x Leveraged ETFs“ Be especially careful about investing in a short leveraged ETF. Any losses during a bull market will not only be amplified but are also potentially unlimited (because, theoretically, an underlying index or other asset can go on rising forever). ”- Emmanuel Ekwomadu
Why Trade 3x Leveraged ETFs?
3x Leveraged ETFs let ordinary investors (i.e., those with standard stockbroker share-dealing accounts) do the sorts of things that traders do with spread bets, contracts-for-difference (CFDs), or options: amplify gains through leverage, and “go short” to benefit from falling markets.
Frequently Asked Questions
You can trade ETFs during market hours in exactly the same way as buying and selling shares, including using advanced order types (if available on your platform) such as limit orders and stop orders. However, an ETF typically represents a basket of shares — such as those in the FTSE 100 index — rather than a single stock.
A 3x leveraged ETF will only increase in value by three times the underlying asset during each day. If you hold such an ETF for longer than a day, you will get a different rate of return because the “derivatives” (i.e. contracts) that are used to achieve the leverage are reset each day and “compounding” comes into play.
A short ETF tracks an underlying index or other asset inversely, so the ETF value goes down when the market goes up, and vice versa. The potential profit from a short ETF is limited because the underlying asset can only fall as far as zero, but the potential loss is infinite because the underlying asset value can rise without limit.
It depends on when the question is asked. A 3x leveraged ETF should provide amplified gains (but not exactly the gains you would expect) during a bull market like the long one that started in 2009 and restarted in April 2020. An inverse (or short) 3 x leveraged ETF should provide amplified gains during a bear market such as the short crash that occurred in March 2020.
All leverage investments should be avoided by beginners, and this is especially true for inverse leveraged ETFs. Start with unleveraged ETFs, then progress to leveraged ones once you’ve learned how to manage your downside risk using stop orders.
Day traders can benefit most (and most predictably) from 3x leveraged ETFs but there is nothing to stop investors from holding these investments for longer periods. You can invest in ETFs via ordinary stockbroker share-dealing accounts, including ISAs and SIPPS in some cases.