UMDD Vs UPRO: Which Is Best?

Exchange-traded funds (ETFs) are one way that investors can put their money into a combination of stocks as well as a variety of other vehicles, like bonds, commodities, or currency, without much effort.

ETFs tend to be well-diversified, well-managed, tax-efficient, and provide access to a specific aspect or subset of the market. If this sounds a bit like a mutual fund, you aren’t wrong.

The difference is that ETFs have a different management structure with lower expense ratios.

ETFs Aren’t Always Straightforward

That said, cost structure counts for a lot. ETF trading costs can be more than the management fees you save and tax savings.

Investors also may not be able to purchase ETFs directly, so there is also a commission on buying shares in ETFs.

Buying into an ETF can make sense when it is a single large buy-in so that there is only one commission, especially if it is a flat-fee. People invest regularly may not have this ability. They could find the total cost of commissions erodes other cost benefits to ETF investment.

ETFs can also have large bid/ask spreads. When it comes to exchange-traded funds, there is always a bid price (what you can sell it for) and an ask price (what you could buy it for), and these numbers can be very different.

The intraday value of the assets it represents also matter. At any given time, the market price of shares in the ETF may not be connected to the value of its underlying securities.

Finally, keep in mind that ETFs are complex investments. ETFs are very different from other investments.

The operational mechanics are highly involved and not straightforward. For instance, there is a 2-day settlement period. You couldn’t sell your ETF shares on a Monday and buy new stocks on a Tuesday with the money from the sale. If your broker does allow the purchase, you’ll be charged interest.

Before you invest in an ETF make sure you understand what you are buying and the ETF you are considering actually fits with your investment strategy. In this article, we are going to look at two ETFs: UMDD vs UPRO.

What Is UMDD?

UltraPro MidCap 400 (UMDD) is issued by ProShares and it tracks the S&P MidCap 400 Index. The expense ratio is a low 0.95%, but there is something you need to know about UMDD.

The ETF is leveraged. It offers 3x daily long leverage, to be exact. Per its website, this makes UMDD “a powerful tool for investors with a bullish short-term outlook for mid cap equities” – and it is not for everyone.

If you have a low tolerance for risk or prefer to follow a buy-and-hold strategy, steer clear of this ETF.

Risks of Investing In UMDD

The leverage on UMDD resets daily. This opens the possibility that returns can be compounded when the ETF is held for several days, for good or bad.

The actual returns investors experience with UMDD can vary considerably from the performance of the underlying index. The leveraging is an issue for other reasons too.

That degree of leverage introduces higher trading costs. Now, add to that lukewarm volume and widespread. Investors will need returns that exceed these fees to make it worth their whiles.

Is UMDD A Buy?

As a short-term investment, UMDD is not a bad investment, but the answer to that question has to do with timing more than anything.

Over the past four weeks, the return on UMDD has been 28.12% and that figure rises to 72.66% when you look at the past 13 weeks. However, UMDD is down nearly 15% this week and over 57% year to date.

Top holdings in UMDD include:

  • Tyler Technologies (TYL),
  • Teradyne (TER),
  • Teledyne (TDY),
  • Fair Isaac Corp (FICO),
  • Factset Research Systems (FDS),
  • Catalent (CTLT), Masimo (MASI), and
  • Molina Healthcare (MOH).

What Is UPRO?

ProShares UltraPro S&P 500 (UPRO) is also issued by ProShares. However, this ETF follows the S&P 500 and its expense ratio is 0.92%.

UPRO’s top holdings include:

  • Microsoft (MSFT),
  • Apple (AAPL),
  • Amazon (AMZN),
  • Facebook (FB),
  • Alphabet (GOOG),
  • Johnson & Johnson (JNJ),
  • Berkshire Hathaway (BRK.B),
  • Visa (V),
  • JPMorgan Chase (JPM),
  • Procter & Gamble (PG),
  • UnitedHealth (UNH), and
  • Home Depot (HD).

UPRO was designed for investors who have a bullish stance on large cap stocks and a short-term investment horizon.

Like UMDD, this ETF is really for more sophisticated investors with higher tolerances for risks and a tendency toward frequent trades. UPRO is not meant to be an investment someone buys and holds.

If you are not highly experienced with different investment vehicles and well educated about investment structures, UPRO is not for you.

Should You Invest In UPRO?

UPRO is like UMDD in that it provides 3x leverage, but it is much more liquid than its mid-cap focuses cousin. Investing in such well-known stocks does have its advantages.

The daily volume is high, and the spread is tight. If you know what you are doing, this ETF is worth your investment if you want to take advantage of leveraging with a portfolio of large cap stocks – but again, timing is everything.

The return on UPRO has been 20.51% over the past four weeks and that performance jumps to 64.92% when you look at the past 13 weeks.

However, UPRO is down 8.61% for this week and it has lost 10.64% year to date.

UMDD Vs UPRO: The Bottom Line

Overall, UPRO offers less downside than UMDD but also less upside potential. The difference between the two ETFs is a classic case of risk versus reward.

Before you take a leap in either direction (or both) make sure that you understand what it means to choose geared investment products.

Even many experienced investors do not look to ETFs to fill their investment portfolios.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.