how ultra etfs achieve leverage
ultra etfs can achieve leverage in a few different ways the strategies below are meant to amplify the potential returns of the underlying index or asset class benefits of an ultra etfif an investor is convinced that the s p 500 is about to rise they will probably want to explore ways to make as much money as possible from this conviction an ultra etf can cater to those needs without incurring the additional expenses and stress of trading on margin a process whereby a broker lends money to customers so that they can purchase stocks or other securities with the securities held as collateral for the loan ultra etfs can be beneficial to tactical investors who are short on capital or allocation space within a diversified portfolio for instance they can invest 5 percent of their portfolios into an ultra etf and gain closer to 10 percent exposure due to the leveraged returns limitations of an ultra etfleverage is a double edged sword it can lead to significant gains as well as significant losses the use of leverage magnifies not only the return potential of these etfs but also the standard deviation making these investments riskier than non leveraged etfs targeting the same index or investment style in other words these vehicles are not for the average investor ultra etfs represent just a small portion of the total etf universe accounting for approximately 73 63 billion or 4 30 percent of the 1 71 trillion total etf market as of december 2023 56anyone looking to make long term buy and hold investments should also steer clear of ultra etfs daily rebalancing and compounding combined with leverage will cause investment results to diverge significantly over time from expectations 3 this is due to the wide variance of performance that make standard performance measures such as the geometric mean of limited use potential payoffs can be significantly impaired by charges too because of their complexity and use of borrowed funds ultra etfs carry much higher expense ratios than standard etfs the average fee for regular etfs is roughly 0 5 percent or 5 00 for every 1 000 invested in 2023 5 ultra etfs on the other hand usually come with expense ratios of 1 or more 6special considerationsultra etfs also enable investors to amplify their returns when shorting or betting against an underlying index inverse ultra etfs or ultra shorts use leverage to make extra money when a market declines in value when used properly they allow sophisticated investors to hedge existing long positions with short exposure 3there are potentially greater tax implications to consider when investing in ultra etfs ultra etfs buy and sell their underlying securities more frequently so when the fund realizes capital gains they may be passed onto shareholders as capital gain distributions should these arise due to rebalancing this may create short term capital gains it is important to understand that ultra etfs may be able to be held in tax advantaged accounts such as iras however be mindful that these etfs often have higher volatility and risk if you lose your capital from investing in an ultra etf it may not be possible to recapture that tax advantage benefit i e you re limited in what you can contribute to your ira each year 