Identification

An exchange-traded fund is a holding of stocks, bonds and/or commodities that usually tracks an index or sector. These funds are similar to mutual funds, but they trade like stock.

Potential

Ultra ETFs are designed to follow a particular index and achieve twice the daily return. For example, if the Dow Jones Industrial Average gains 2.2 percent in a day, an ultra ETF that tracks the Dow would gain 4.4 percent; this increases your profits. However, the opposite is also true. If the Dow loses 2.2 percent, the ultra ETF loses 4.4 percent.

Misconceptions

A common misconception is that an investor can put money into an ultra ETF for a long-term investment. An ultra ETF should be utilized in a short-term time frame. This is because long-term returns tend to diverge from the desired return, and the ultra ETFs only aim is to achieve twice the daily return. Ultra ETFs are more suitable for day trading.

Benefits

Investors with little capital or allocation space can use ultra ETFs to their benefit. Five percent of their diversified porfolio can be invested into an ultra ETF and they gain closer to 10 percent exposure because of the leverage returns. However, ultras can have a higher expense ratio than standard ETFs.

Warning

Consult your financial planner or adviser before putting money into ultra ETFs.

Source:

Ultra ETF Explained