Thanks to the Wall Street’s creativity and financial engineering, in today’s markets, there are thousands of different instruments that investors can choose and trade depending on their risk appetite. Exchange traded funds (ETFs) are the most commonly used instruments in the market nowadays with the variety of the investment options provided by the issuers. Given their low expense ratios and diversification effect, most people generally prefer to invest into a broad market index ETFs such as SPY for S&P 500 or ES3 for Singapore’s STI index. However, there is one type of ETF that investors should be extremely careful when investing or trading.
Leveraged ETFs, via financial derivatives and debt instruments, provide 2x or 3x times of the daily performance of the underlying index either to the upside or downside. For instance Direxion ETFs are called with “Bull 2x”, “Bear 3x” labels to represent the leverage amount and the direction of the position whether you are bullish or bearish on the underlying.