Can you short 3X ETFs?
Leveraged 3X Inverse/Short ETFs seek to provide three times the opposite return of an index for a single day. These funds can be invested in stocks, various market sectors, bonds or futures contracts. This creates an effect similar to shorting the asset class.
A leveraged ETF uses derivative contracts to magnify the daily gains of an index or benchmark. These funds can offer high returns, but they also come with high risk and expenses. Funds that offer 3x leverage are particularly risky because they require higher leverage to achieve their returns.
The ProShares UltraPro Short S&P 500 (SPXU) is an aggressively leveraged inverse ETF available to investors. SPXU seeks to replicate the S&P 500 performance, but in the opposite direction and multiplied by three. SPXU is not suitable for long-term investing and is meant to be held for one day or less.
BMO has launched the first quadruple leveraged ETN fund that tracks the S&P 500. The fund will trade under the ticker symbol "XXXX" and seeks to generate four time the S&P 500's return on a daily basis. The launch come as bullishness rise among investors and Wall Street predicts more gains to come in 2024.
The ProShares UltraPro QQQ ETF offers tech bulls a way to generate leveraged returns from the Nasdaq 100, but it can also be used as a vehicle to short. Shorting the TQQQ can be profitable during bear markets and even sideways markets due to the impact of beta slippage, but it comes with high volatility and risks.
The Bottom Line. Yes, you can short ETFs. Short selling ETFs aims to provide returns that move in the opposite direction of a specific underlying index or asset class. This strategy is suitable for investors seeking to hedge against market downturns or capitalize on bearish market trends.
This longer-term underperformance results from ill-timed rebalancing and the geometric nature of returns compounding. The author uses the concept of a growth-optimized portfolio to show that highly levered ETFs (3x and inverse ETFs) are likely to converge to zero over longer time horizons.
Leveraged 3X Inverse/Short ETFs seek to provide three times the opposite return of an index for a single day. These funds can be invested in stocks, various market sectors, bonds or futures contracts.
ProShares UltraPro QQQ (TQQQ)
The largest ETF in the leveraged space, the ProShares UltraPro QQQ aims to track the daily performance of the Nasdaq Composite with three times leverage.
Leveraged Assets
The risks scale up faster than the leverage, with the 3x leveraged ETF showing more than four times the standard deviation of returns. Simultaneously, the returns scale up slower than the leverage, with the 2x ETF only outperforming by 26%, and the 3x ETF even lagging the unleveraged index.
Are there 5x leveraged ETF?
The Leverage Shares 5x Long US Tech 100 ETP Securities is designed to provide 5x the daily return of Invesco QQQ Trust (QQQ) stock, adjusted to reflect the fees and costs of maintaining a leveraged position in the stock.
Because leveraged single-stock ETFs in particular amplify the effect of price movements of the underlying individual stocks, investors holding these funds will experience even greater volatility and risk than investors who hold the underlying stock itself.
If you held underlying index XYZ directly and then levered it up three times directly with your broker dealer, the losses could potentially cause your position to fall below zero. In other words, you could potentially be liable for more than you invested because you bought the position on leverage.
Unlike traditional ETFs, leveraged ETFs like TQQQ have a high turnover and utilize derivatives contracts. These features make them less tax efficient. In general, taxable distributions from such ETFs are taxed as ordinary income.
Theoretically, if the market were to fall by more than 33.3% in a single day, TQQQ 's Net Asset Value (NAV) would fall to zero, and the fund would be dissolved.
Don't hold it long term for anything more than your “play money”, which for those that even allow for “play money” in their IPS is no more than 5%. The biggest risk is a sideways choppy market. You will get killed from the volatility in that environment.
Because they rebalance daily, leveraged ETFs usually never lose all of their value. They can, however, fall toward zero over time. If a leveraged ETF approaches zero, its manager typically liquidates its assets and pays out all remaining holders in cash.
In contrast, the riskiest ETF in the Morningstar database, ProShares Ultra VIX Short-term Futures Fund (UVXY), has a three-year standard deviation of 132.9. The fund, of course, doesn't invest in stocks. It invests in volatility itself, as measured by the so-called Fear Index: The short-term CBOE VIX index.
So, if you invest in a 3x leveraged ETF, its return ratio would be 3:1. In turn, should the value of the underlying index increase by 1% on a given day, your returns would actually be 3%. The daily nature of these funds ultimately makes them best suited to be short-term securities.
The SQQQ is meant to be held intraday and is not a long-term investment, where expenses and decay will quickly eat into returns. It is not appropriate as a long-term holding, even among bearish investors.
How fast does SQQQ decay?
Historically, SQQQ decays around 7-8% per month, though this would likely be around 4-5% per month during a flat market such as that experienced so far this year.
| Symbol Symbol | ETF Name ETF Name | % In Top 10 % In Top 10 |
|---|---|---|
| FNGU | MicroSectors FANG+™ Index 3X Leveraged ETN | 100.00% |
| SPXL | Direxion Daily S&P 500 Bull 3X Shares | 46.42% |
| TECL | Direxion Daily Technology Bull 3X Shares | 70.14% |
| UPRO | ProShares UltraPro S&P500 | 52.90% |
| Rank | ETF | % Shares Short |
|---|---|---|
| #1 | XRT - SPDR S&P Retail | 319.19% |
| #2 | FCFY - First Trust S P 500 Diversified Free … | 243.04% |
| #3 | KOLD - ProShares UltraShort Bloomberg … | 182.41% |
| #4 | PSCM - Invesco S&P SmallCap Materials | 60.76% |
ProShares UltraPro Short S&P500 (SPXU)
With three times the inverse daily return of the S&P 500, this is a very aggressive ETF. If the market declines on the day you buy SPXU, you'll potentially earn three times the inverse of the decline, provided that you sell at the end of the day.
Short-Term Products
Investors can hold the ETF for longer than a day, but returns can vary significantly from 2x exposure over longer periods. That's because the ETF resets its leverage daily. In oscillating markets, the leverage reset can significantly erode returns.
