Published on: December 16, 2022
Author: Milos Jakovljevic
|Table of Content
|Which gold ETF is best in 2022?
|What is the best 3x leveraged ETF?
|Are there 4x leveraged ETFs?
|Are 3x leveraged ETFs good?
|Can you hold 2x leveraged ETFs long-term?
As we move into the final quarter of a turbulent financial year, many investors are looking to use optimum trading methods to maximize their profits. When investing in any commodity, such as gold, it’s crucial to know how other traders are looking to enter the market around you. Gold trades can be executed in a number of different fashions. One of the most popular methods is via an ETF (Exchange-Traded Fund). “A what traded fund?” I hear you say into your phone. Don’t worry. It’s not as complex as it sounds!
An ETFs primary purpose is to remove the direct involvement from your investment and aim to manage the risk more effectively for you. Gold ETFs are managed funds that track the price across the market for the precious metal and allow you to invest more generically than through physical ownership of gold. Think of it as a shopping basket of investments instead of just one.
It is comprised of funds that will measure the gold price and allow you to invest in it without having to physically own the commodity. Using mobile trading apps like amana gives you access to a range of markets, including commodities, effectively keeping your portfolio under the same umbrella.
It can't be easy to distinguish what makes a gold ETF stand out from its competitors. Market analysts agree that you can boil it down to three important factors. Due to the size and scale of the top ETFs, they will all have considerable overheads. The overheads can range from employment costs to advertising and marketing.
The fund will take a percentage as a ratio of the fund price to pay for these costs. This is known as an expense ratio. Ideally, you want an ETF to have an expense ratio lower than 1%. Some operate between the margin of 1-2%, but this is generally considered excessive. While it doesn't indicate bad practice, it may mean the fund's management isn't as concise as other top ETFs in the market.
Another key point to look for when it comes to leveraged gold ETFs is whether they have a large amount in their portfolio. Anything over $100 million is considered substantial, but the funds at the higher end of the spectrum will manage assets in the $200 million+ region. I’ve just checked my bank balance, and it certainly rules me out!
Such a large amount indicates they can manage the fund well under pressure. In addition, they are less likely to take risks with your investment. Primarily due to the size of the assets under their belt.
The final point is to identify whether the ETF is non-leveraged. Leverage trading is a fairly complex method involving higher levels of risk than standard spot trading, where you purchase an asset for a live price and then sell it later. This is less important than the other two factors, but you must know the risks involved.
If an ETF is leveraged, this means that any gains and any losses are amplified. Whilst leverage trading can be highly profitable, like any form of trading, it carries major risk. Even the less risky forms of trading can result in losing your initial investment. You must be extremely careful and perform plenty of due diligence before entering the market. Any investment carries this risk, and the markets can be extremely volatile.
Regarding leverage trading, the higher the amount, the greater the risk. By using larger multipliers, you can amplify your losses. You must understand leverage trading before entering the market, as it can result in substantial losses.
A 3x Leveraged ETF may sound complex, but all it is referring to is that any market movement is amplified by a multiple of 3. If the ETF increases by 2%, your rate of return will be 6%. If the ETF dips by 5%, your losses will be 15%. These are basic figures you won’t have to get your calculator out for. Some real-life examples might use slightly different figures.
These funds carry additional risk as they adopt additional leverage to maximize profit. Leveraged ETFs are primarily considered a short-term specialist strategy but carry considerable risk over a longer period.
4x you say?! Yes, a select group of funds can be invested using 4x leverage. Again, this works identically to a 3x leveraged ETF, but the figures are multiplied by four instead of three. So, if a fund drops by 5%, you will lose 20% of your investment. The risks are clear with this type of trading, and it’s best suited to high-level professional traders with vast experience in ETF trading. Currently, there are no 4x leveraged ETFs, but there are several in forex trading, mainly down to the exceptionally high levels of liquidity.
If you invest well and you receive triple the returns, then yes, ETFs are certainly good! But if you enter a trade with a 3x Leveraged ETF and the market slumps, you could find yourself in a very difficult financial position. Overall, analysts have identified the benefits and positives of leveraged trading. Still, it isn't a recommended route for beginner traders due to the amplified nature of the market, especially in times of volatility. Even if you opt for a simpler version of trading, like forex beginner trading, you can still stand to lose your whole investment as your capital is always at risk.
Leveraged trading isn't considered an optimum way of investing long-term. As the risks and rewards are exacerbated at each end, remaining in a leveraged position for a long time shortens the likelihood of executing your position in profit. You'll be hard-pressed to find traders or analysts who would recommend holding a leveraged position for any other period that isn't short-term.
Even if the position is profitable, you could stand to lose money due to volatility decay. This means that your position could fluctuate far more intensely due to the highly concentrated type of investment you have undertaken. The fluctuation will hurt your leveraged position and cause you to lose money even if the asset price continues to move in your preferred direction.
Whilst leveraged trading can result in greater short-term profits for traders who know how the market works. It can also result in more severe losses than a standard trade. Ensuring you fully understand how the market works and ETFs operate is imperative before considering investing in an ETF, never mind a leveraged ETF.
Always invest with caution and accept potential losses. Even if you think your trade is guaranteed to return a profit, your capital is always at risk, and your investment can end up going to zero.