Pros and cons of leveraged ETFs

Some of the most popular ETFs (exchange traded funds) are the double and triple leveraged products. Some are drawn to them for the adrenaline rush, the excitement of big moves each day. Some might use them strategically in low doses.

Pros: leverage, IRA eligible, no margin calls, no expiration

Cons: leverage (if you are wrong), decay, expenses

Decay takes place because of trading expenses, and daily adjustments. Over the course of a year, decay and adjustments might eat 20% or so of the potential return. For example if SLV moves up 10% in a year, in theory AGQ would go +20%, but because of the decay it might be flat. That's just a guess, and would also depend on the daily moves in SLV. Bigger daily moves, mean bigger daily adjustments and more decay over the course of a year.

Someone buying and holding for a month or more might do better using straight margin and paying the margin interest. The decay tends to be higher on the leveraged ETFs vs. the margin interest rate. Margin isn't allowed in retirement accounts.

Someone taking a shot might also consider buying options. With options, a person can get much more than 2x or 3x leverage. The option has defined downside albeit 100% of the cost of the option. The cons of the option are that decay tends to be quicker and more costly on the option. No realistic person will want to bet 100% of their account on a single option play. Speaking from personal experience, when I get to be that sure of something, it is almost surely a big loser.

Someone mentioned the idea of a leveraged ETF that tried to double or triple the return of an index product over a full year instead of day to day. The straight version of that would be to buy on margin. There still would be the margin interest, but that is much less than the decay rate on the typical ETF. The downside to straight margin is the need to rebalance and buy more if it moves higher, and the possibility of margin calls on a spike lower.

The only leveraged ETF I tend to trade is TBT. The others tend to move too quick for my taste. However, as I always write, just because something isn't right for me, doesn't mean it isn't right for someone else.