| If you have been watching investing TV | | | | start seeing dollar signs in front your face, you |
| commercials lately, you have probably seen the | | | | should also consider the reverse. If the sector |
| the popular ETF commercial. It starts with a guy | | | | were up 5%, your loss would be 10%. Thats |
| daydreaming and suddenly finding himself taking a | | | | what the leverage does for you, accelerates your |
| tour of his own mind. In here, he comes across | | | | profits and losses. There are 100+ funds available |
| several little mini-me versions of himself running | | | | across a variety of sectors a few of the 2X |
| around. When he asks someone who these | | | | leveraged type. |
| people are, the tour guide tells him that these are | | | | So, how do investors/traders profit from these |
| his investment ideas. The guy then asks 'Why are | | | | ETFs? Two ways - Speculation and Hedging. |
| they so small?'. At this point, the guide points to a | | | | Traders or speculators pick a long or short |
| corner of the room to a giant version of himself - | | | | position depending on the direction the market |
| 'Not all of them are. This one has been here for a | | | | sector is heading. If they are right they cash in |
| while and we think you should let him out'. At this | | | | their profits. Very rarely do traders hold |
| point the company name flashes across the | | | | leveraged positions for long periods of time due |
| screen. | | | | to risk of high losses and small window of |
| This was definitely one of the more engaging ads | | | | opportunity. As far as the hedging strategy is |
| related to investing. When I saw this | | | | concerned investors or money managers hold a |
| advertisement, I thought this clearly showed the | | | | smaller 2X leveraged position in the opposite |
| profit potential of the 2X leveraged Exchange | | | | direction of their main trade e.g. if the financials |
| Traded Funds that made Proshares famous. | | | | index were expected to move upwards, they |
| These funds return 2 times (also called 2X) the | | | | would buy stocks of a few financial firms and buy |
| return of the underlying index. Its easier to | | | | a smaller position in the 2X ETF. The aim would |
| understand through an example. Lets assume that | | | | be to offset any potential losses in case the |
| you think the financials sector were going to | | | | market moves drastically against the financials. |
| suffer in the short-term you want to be shorting | | | | Are 2X leveraged funds right for the novice |
| one of the indexes. If you were very confident | | | | investor? Most definitely not. These funds are |
| and wanted to take on more risk for a greater | | | | best used by sophisticated investors with |
| reward you would by the 2X inverse of the | | | | significant experience. Do your due diligence, only |
| financials sector. So, if the index fell down 5% as | | | | use these with tight trading stops so that your |
| you had anticipated and you had invested in the | | | | profits are locked in and potential losses are |
| 2X leveraged short ETF your returns would be | | | | limited. |
| 10% (twice the return of the index). Before you | | | | |