SPXL vs UPRO: With each passing year, more exchange-traded funds (ETFs) come on the market, with that number almost reaching the 2,000- milestone. This gives investors a wide range of funds they can add to their portfolio. ETFs allow investors not to have to buy a single stock and hope it goes their direction.
Instead, an ETF follows a slew of stocks, industries, or indexes, such as Dow Jones and the S&P500. As the trend continues, more investors favor ETFs over mutual funds thanks to the speedy liquidation versus a mutual fund that typically trades at the end of the day.
While there are tons of ETFs available on the market, leveraged ETFs offer a way to amplify returns – but beware losses are magnified too.
Direxion Daily S&P 500 Bull 3x Shares [NYSEArca: SPXL] and ProShares UltraPro S&P 500 [NYSEARCA: UPRO] are two leveraged ETFs that show some promise. But how do you know which one to choose from? It’s essential to understand the basics of leveraged ETFs and their pros and cons. Here’s what you should know:
Why Trade Leveraged ETFs?
Leveraged ETFs are similar to any other ETF you will come across. The primary difference is in the profile. Here, you will see the words “double…” or “triple the daily performance of the underlying index.” What this means is that your gains and losses are amplified by 2x or 3x respectively.
For instance, if you were to invest in the S&P500 and your leveraged ETF is double that of the performance of that index, then your return will be double compared to you owning each share of stock in that index.
These leveraged ETFs are widely used by experienced investors to increase their potential earnings significantly. But if you’re looking for a long-term investment, leveraged ETFs may not be the best fit trading strategy to implement.
Instead, many investors hold on to leveraged ETFs for a day or even up to a week. However, some fund companies advise against this hold-and-trade strategy.
Moreover, there are no guarantees on doubling or tripling your returns. Thus, it’s essential to do the research to enhance your leveraged ETF strategy.
UPRO is a leveraged ETF issued by ProShares in mid-2009 and is the little brother of the ProShares-issued leveraged ETF SSO.
The main difference with ProShares UltraPro S&P 500 [NYSEARCA: UPRO] is that it aims for returns of 300 percent of the S&P 500 versus just double the return that SSO does.
That means that you could potentially earn a return three times that of the daily performance of the S&P500.
UPRO is a way for an investor who believes that the S&P 500 will continue to grow but is unsure of the best-suited stock. Instead of worrying about an individual stock, you only need to focus on the overall performance on the index when you invest in UPRO.
If the performance is good, you may earn a higher returned on the investment you made compared to buying the index itself.
But like all leveraged ETFs, UPRO has its advantages and disadvantages that are worth considering:
- UPRO has made more return year-to-date (YTD) than if you would have just invested in S&P regularly.
- It is an easier way to invest in the S&P 500 versus buying each stock separately.
- UPRO has a history of high volume compared to other triple-leveraged ETFs.
- If the performance doesn’t go your way, then you may experience a high risk to your investment.
- UPRO often delivers a lower dividend yield, unlike its brother SSO.
- ProShares UltraPro S&P 500 [NYSEARCA: UPRO] is highly volatile, as it can rapidly increase and decrease throughout the day.
What Is The SPXL?
Direxion Daily S&P 500 Bull 3x Shares [NYSEArca: SPXL] is similar to UPRO but also has its differences.
Direxion issues this leveraged ETF that first hit the market in 2008, and it also offers a potential to earn three times your return based on the market performance of the S&P 500.
However, it differs from ProShares UltraPro S&P 500 [NYSEARCA: UPRO] in price. The two typically vary in trading prices by $2 to $5, with SPXL costing less than UPRO. However, SPXL also has its own benefits and drawbacks:
- SPXL has a higher dividend yield than that of UPRO.
- It’s also available at a lower trading price compared to other 3x S&P500 ETFs.
- You may incur a higher cost for owning this ETF compared to others.
- High rewards potential means high risk. That means you have a higher risk of losing your investment if the performance suddenly drops rapidly, thanks to its triple performance return potential.
- SPXL is subject to rapid up and downswings in the market, making it highly volatile.
From a performance standpoint, both SPXL and UPRO net similar results. However, the cost of each ETF varies. The price of owning shares with SPXL is lower than UPRO by almost one percent.
While both SPXL and UPRO have a reasonable volume, UPRO does trade nearly 10 percent more shares per day on average than that of Direxion Daily S&P 500 Bull 3x Shares [NYSEArca: SPXL].
That means you may increase your chances of finding a buyer quickly when you are ready to sell your shares.
Although UPRO is a newer index than SPXL, slightly more investors tend to buy UPRO versus SPXL. So, deciding the best fit leveraged ETF depends on your personal trading strategy.
SPXL Vs UPRO: Final Thoughts
Leveraged ETFs like Direxion Daily S&P 500 Bull 3x Shares [NYSEArca: SPXL] and ProShares UltraPro S&P 500 [NYSEARCA: UPRO] achieve returns by two or three times that of the index that they are tracking.
This may increase your return by that much, but it can also do the same if it goes against you. With such high market volatility, leveraged ETFs can quickly scare novice investors who may act on emotion to sell too quickly at a loss.
Instead, these types of ETFs are best suited for experienced investors who can take on risk and manage market volatility. Thus, it’s essential to consider your investment goals and expertise and to do your research before investing in leveraged ETFs. By taking these steps, you can choose the best-leveraged ETF strategy that fits your needs.
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