English
Back
  • English
  • 繁體中文
  • 简体中文
  • Dark
  • Light
Open Account

Futu Research | ETF Investment Research

Views 33452024.11.12

[Reverse ETF] Leveraged and Reverse ETF Investment Guide: Can I Hold for the Long Term? Under what circumstances is it suitable for investment?

LEVERAGED ETF AND REVERSE ETF, AN ETF WITH LEVERAGED ATTRIBUTES, IS AN ETF (EXCHANGE-TRADED FUND) THAT HAS LOW THRESHOLDS TO INVEST IN A BASKET OF ASSETS AND IS HIGHLY SOUGHT AFTER BY MARKETS WITHOUT THE NEED TO BE FINANCED AND OFTEN USED AS A SHORT-LINE SPECULATION OR HEDGING TOOL.

However, many investors do not yet understand what leveraged and reverse ETFs are. Next, we will discuss the concepts and principles of leveraged and reverse ETFs, investment advantages and risks, the popular leverage and reverse ETFs in Hong Kong and reverse ETFs, and more specifically how to invest in these ETFs.

What is a Leveraged ETF?

As I said at the beginning,Leveraged ETFThis means that you do not need to use financing, and ETFs that allow you to do many times more for related indices or assets.

Currently, the leveraged ETF on the market is divided into three types of leverage multipliers of 1.5x /2 times /3x. For example, if you invest in an ETF that is 3 times the leverage of the Nasdaq 100, if the index closes up 1% on the day, the ETF will rise by 3%; but if the index falls 1% on the day, the index will fall by 3%.

What is a reverse ETF?

When the market is feeling bad or you are already in a downtrend,Reverse ETFIt will come in handy. It is generally used for two purposes: combination risk hedging and short-term speculative trading.

Reverse ETFs, like regular ETFs, track the performance of related indices, but the difference is that reverse ETFs attempt to build a movement opposite to the related index. In addition to the 1x reverse ETF, there are 1.5/2/3 times leveraged reverse ETFs in the market. For example, if you invest in a reverse ETF with 3x the leverage of the Nasdaq 100, if the index closes up 1% on the day, the ETF will fall 3%; but if the index falls 1% on the day, the index will rise 3%.

Like a leveraged ETF, a reverse ETF is also based on the performance of the relevant index or asset on the day and has the same benefits and risks as a leveraged ETF.

Characteristics of Leveraged and Reverse ETFs

A leveraged ETF is a double-edged sword that can magnify gains with good, and worse losses. What occasion and what type of investor is it suitable for compared to other leveraged and void related assets? What are the advantages and disadvantages?

Which ones are suitable for investing in leveraged ETFs?

Investors with a certain investment experience and a higher risk preference. Conversely, reverse ETFs are more difficult to invest in than positively leveraged ETFs.

What types of markets are Leveraged and Inverted ETFs applicable to?

  • LEVERAGED ETF: SUITABLE FOR UNILATERAL BULLISH TRADING WITH A CLEAR TREND, SUCH AS FOR A WIN CHASE IN A BULL MARKET, OR WHEN AN INDEX OR STOCK IS SUBJECTED TO A REBOUND.

  • Reverse ETF: For one-sided bearish actions with a clear trend, such as for taking profits in a bear market, or when an index or a stock is retracting from its peak.

What are the advantages of leveraged and reverse ETFs?

  • No Borrowing: Buying a leveraged ETF requires no borrowing and no financing interest.

  • Don't worry about a blowout: No margin trading is involved. Don't worry about a blowout if the stock price fluctuates sharply.

  • Simple operation: You can buy with a stock account, and there is a professional body to manage the underlying assets for you.

  • Easy to understand: Reverse ETF prices are only related to the corresponding asset price and are not affected by maturity dates, pullback fluctuations, etc., and are relatively easy to get started.

What are the disadvantages of leveraged and reverse ETFs?

  • More suitable for single side markets: there will be additional losses in turbulent markets and ETF performance will not match the performance of related assets.

  • Higher rates: Leveraged ETFs are also often added to the portfolio of futures or swaps. To avoid large deviations from the tracking criteria, fund managers need to trade these contracts frequently, which may incur losses in the process, which are also deducted from the ETF's net asset value.

  • Relatively low leverage ratios: up to 3x leverage and reverse ETF leverage multipliers, and futures, options, and derivatives, such as options, are more small-scale, with potentially large potential gains in investing less capital, and leverage multipliers of up to 10x or even more.

How Leveraged and Reverse ETFs Work

Both leveraged and reverse ETFs operate on the basis of a “rebalance” mechanism. Simply put, ETF leverage is based on the performance of the relevant index or asset on the day.

The following is a simple explanation with two examples that you can skip without wanting to look:

Case 1: Assume the initial value of index A is 100. The index is up 10% every day for 3 days in a row and 33.1% for 3 days. If there is an ETF that does 2 times more index A and starts at 100, what would be the result three days later? Due to the rebalancing mechanism of the leveraged ETF, the ETF is up 20% daily for a 3-day gain of 72.8%.
Scenario 2: Assume the initial value of index B is 100. The index maintained a 10% gain the day before and 10% the following day; after 6 days, it fell 2.97%. There is also a 2x multi-index B ETF with a starting value of 100 with a drop of 11.53% 6 days later.

In short, a leveraged ETF can help magnify potential gains and losses when an index or asset is in extreme strength.

However, those who have actually invested know that this is rare, market trends are not always so obvious and in most cases the future is difficult to predict. In the event of market volatility, long-term leveraged and inverted ETFs are unlikely to outperform the relevant assets, and even sideways movements of the benchmark asset may occur, but leverage and reverse ETFs decline.

Are Leveraged and Reverse ETFs Suitable for Long Term Holds?

Based on the above operating principles of leveraged and reverse ETFs, in theory, leveraged and reverse ETFs are not suitable for long-term holding, and all ETF issuers emphasize this risk.

But under certain conditions, medium-long line leveraged and inverted ETFs also have the potential for hefty potential returns.

For example, from January 3, 2023 to October 24, 2024, the Nasdaq 100 Index increased 86.26%, and the TQQQ, 3x the Dona index, increased 346.78%.

TQQQ
TQQQ

Even if the long-term trend is on the rise, it is difficult to avoid varying degrees of pullback in the middle. From July 11, 2024 to August 5, 2024, the index experienced a large continuous decline of 13.45%, and TQQQ also experienced its largest pullback since 2023, with a total decline of 36.87% during the period.

Therefore, if you want to hold a leveraged or inverted ETF for a long time, you need to take greater risks, while meeting the following two prerequisites:

  1. Accurate selection of associated assets: choose a medium-long line that is in an uptrend or downtrend, a target asset with less volatility (the index is more suitable for individual stocks), and hold a leveraged ETF in the main up/down cycle;

  2. Investors are more demanding on their own investment capacity: investors have sufficient investment experience to gather adequate market information in a timely manner and know how to combine analysis of the current macroeconomic environment to determine medium-term target asset trends and have a clear and clear investment strategy.

Top US Stock Leveraged & Reverse ETFs

The US equity market has many leveraged and reverse ETFs to choose from and track a wide range of assets. Popular ETF trades are active to meet investors' diverse investment goals and investment strategies. Based on the different asset types involved, we will introduce relatively large, more actively traded leveraged and inverted ETFs in the same types of US equity markets.

Track the Big Dial Index

Track a hot topic or industry

Track a Single Star Stock

【Learn More】Want to know what a single stock ETF is? Click here for more tutorial content.

Track assets other than stocks

Data source: Futubull. Data are based on October 24, 2024, to track the trend of the same asset class and the reversal of the largest and most actively traded ETFs in the ETF asset model.

Popular Hong Kong Stock Leveraged & Reverse ETFs

Leveraged and inverted ETFs are relatively scarce in the Hong Kong market. Among them, ETFs that track major indices (Hang Seng Index, Hang Seng Technology Index) have a larger asset size and are more actively traded, and are loved by Hong Kong investors.

Track Hong Kong Stock Index

Track Mainland A-share indices

Other Assets

Data source: Futubull. Data are based on October 24, 2024, to track the trend of the same asset class and the reversal of the largest and most actively traded ETFs in the ETF asset model.

How to invest in leveraged and reverse ETFs?

With the ETF filter selector in Futubull App, you can find the leading and reverse ETFs in just 3 steps.

Open a limited-time ETF account, enjoy a thousand yuan welcome bonus and enjoy a commission-free trade in Hong Kong stocks ETF trading

Step 1: Find the ETF Filter

Open the Futubull App, select “Market” in the navigation section at the bottom of the page, click “ETF” at the top of the page;

In the “ETF Tools” column, select “ETF Filter”

Step 1: Find the ETF Filter

Step 2: Set ETF Filtering Criteria

Open the “ETF Filter” and click “Create Strategy”;

Select a country or region at the top of the page, for example: If you want to find a US equity ETF, select “United States”;

Click Add Criteria, choose Topic or Track Index. For example, if you want to invest in an ETF related to the Nasdaq 100 Index, check “Nasdaq 100” in Tracking Indices; if you want to invest in a Semiconductor ETF, check Semiconductor ETF in Topics;

Select “Leverage”, tick the desired leverage multiplier, click “Finish” to get the filtered result

Step 2: Set ETF Filtering Criteria

Step 3: Contrast the Filter Results

Swipe the list left and right to further compare the trading volume and leverage multiplier of the ETF;

If you have more than one ETF with the same direction and leverage multiplier, it is recommended to choose a higher volume ETF.

Step 3: Contrast the Filter Results

Want more ETF hands-on tutorials? You can click on the following link:

LEVERAGED ETF | CHASE OR BOTTOM: TEACH YOU HOW TO CHOOSE A LEVERAGED ETF
Reverse ETF | Bear Market Doesn't Surprise! Accidental Reverse ETF Crisis
Learn more about ETF investing tips

One-stop trading with Futubull

Enjoy welcome rewards and lifetime 0 commission on HK stocks

Terms and conditions apply right-arrow

| GENERAL DISCLAIMER |

This report (the “Report”) is prepared by Futu Securities International (Hong Kong) Limited (“Futu Securities”). The person who retained this Report either via receiving and/or reading  (including any relevant attachment), shall agree to be bound by the terms and limitations set out below as has the right to retained this Report. Any failure to comply with these limitations may constitute a violation of the law.

This Report shall not be reproduced in whole or in part, distributed or published by you for any purpose. Futu Securities shall not be liable for any direct or consequential loss arising from any use of material contained in this Report.

The information contained in this Report has been obtained from public sources which Futu Securities has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in this Report are based on such information and are expressions of belief only.

Futu Securities has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in this Report is subject to change, and Futu Securities and/or its affiliated companies (collectively the “Futu Group”) shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will Futu Securities be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages.

Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this Report are as of the date indicated and are subject to change at any time without prior notice.

This Report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. This Report should not and does not constitute an offer, solicitation, invitation, recommendation for buying or selling of investment products or as basis on making any investment decision, or constitute as professional advice from any member of Futu Group. The products mentioned in this Report may not be suitable for all investors and a person receiving or reading this Report should seek advice from a financial adviser regarding the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.

This Report should not be relied upon as authoritative without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this Report has been made available constitutes neither a recommendation to enter into a particular transaction nor a representation that any product described in this Report is suitable or appropriate for the recipient. Recipients should be aware that many of the products which may be described in this Report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.

This report is provided by Futu Securities, which is regulated by the Securities and Futures Commission of Hong Kong (SFC) in Hong Kong. If you have any questions about the Futu Securities Research Report, please contact Futu Securities. The CE number of SFC held by the author has been disclosed next to the author's name on the front page of the Report.

Nothing in this Report shall be construed to be an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in this research should take into account existing public information, including any registered prospectus in respect of such security.

The Relevant Report does not have regard to any individual-specific investment objectives or financial situation. Individual investors should seek professional advice from an independent financial adviser, and refer to the relevant offering documents and/or other latest published information on the ETF including the risk factors regarding the suitability of specific investment products.

Information in the Relevant Report has been obtained or derived from sources generally available to the public and believed by the analyst(s) to be reliable.

All investments carry risks, and it is possible to lose the entire investment amount. Any past performances, projections, forecasts or simulation of results are not necessarily indicative of the future performance of any investments.

The ETF has not been and will not be authorised by the SFC under section 104 of the SFO. The Relevant Report does not constitute an advertisement, invitation or document which is or contains an invitation to the Hong Kong public to acquire an interest in or participate in a collective investment scheme under section 103 of the SFO.

| Certification |

Analyst(s) certified that (i) the views expressed in this Report accurately reflect his/her personal views on the listed corporation in this Report; and (ii) no part of his/her compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this Report.

Analyst(s) certified that he/she and/or his/her associate did not deal in or trade the listed corporation or its relevant securities within the 30 days prior to and 3 business days after the issue of this Report.

| Disclosure of Interest |

Analyst Disclosure: Neither the analyst(s) preparing this Report nor his/her associate has any financial interest in or serves as an officer of the listed corporation covered in this Report.

Firm’s Disclosure: Futu Securities does not have any investment banking relationship with the listed corporation covered in this Report in the past 12 months nor any financial interest of 1% or more of the market capitalization in the listed corporation. In addition, no executive staff of Futu Securities serves as an officer of the listed corporation.

| Availability |

The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Futu Securities to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.

Information contained herein is based on sources that Futu Securities believed to be accurate. Futu Group and/or relevant personnel (i.e., employees of Futu Group) may have positions and transactions in relevant investment products. Futu Group and/or relevant personnel does not bear responsibility for any loss suffered by the investor from the use of or reliance on the information set out in this report.

For details of different product's risks, please visit the Risk Disclosures Statement on http://www.futuhk.com.

This Report is written in Chinese and English, and the two versions are equally valid. If there is any contradiction between the two versions, the English version shall prevail.


Recommended

    sidebar-banner-img
    On this page