This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

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 Work

Assume 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.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
SSO $135.80 1.20%
AAPL $129.09 0.49%
FB $79.74 0.98%
GOOG $571.00 2.30%
TSLA $197.30 -3.00%

Markets

DOW 18,288.63 +155.93 0.86%
S&P 500 2,117.39 +12.89 0.61%
NASDAQ 5,008.0960 +44.5690 0.90%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs