New ETF Offers Leverage and Pitfalls
Everyone knows someone who blew up his account due to improper use of leverage. The term "leverage freak" comes to mind. But there are ways to use leverage without dealing yourself a financial death blow.
ProFunds just launched a series of ETFs that are designed to capture twice the move of the underlying indices mimicked. Because the most common equity benchmark is the S&P 500, I'll comment on the ProShares Ultra S&P500 fund (SSO).
Here are the nuts and bolts: The fund will charge a 0.95% fee and wll aim to capture double the movement of the S&P 500 index through leveraging with index futures and options. The prospectus goes to great lengths to try to explain the various ways it will overshoot and undershoot the goal of capturing double the index's move -- and the prospectus is a must-read for anyone considering this fund.
I'm more interested in the strategy of the fund than its nuts and bolts, however. The goal of ProShares Ultra S&P500 is to beat the market, but there are a couple of flies in the ointment. First, let's look at how this ETF could be used in a portfolio.
How It Could WorkAssume for a moment that the fund perfectly captures double the returns of the S&P 500. In that case, a portfolio of 50% in this ETF and 50% in the money market would beat the market by the amount of interest income. Now try it with some numbers: If the S&P 500 rose by 5% over the next 12 months, the ProShares Ultra S&P500 would go up by 10%. The remaining cash could be in a money market yielding 4%. That 4% would deliver an additional two percentage points of return to the total portfolio, thus outperforming the market. If interest rates move higher, as appears likely, the extent to which the concept outperforms would improve.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV