Understanding Leveraged Funds & GP’s Trading Strategy for These Funds
How to use leverage funds to increase your returns to build wealth faster
Hey, MFG!
I hope you’re doing well and getting RICH this summer!!
Today’s message is about leverage. You must learn to leverage your time, your talent, and your treasure when you’re not there for high income and to build wealth.
Stock trading is a way of leveraging yourself. I like to trade leveraged funds for the high risk and potential of 2-3x returns.
Leveraged funds offer the significant advantage of achieving substantial market exposure with a smaller initial investment.
This frees up capital for other investment opportunities and allows more traders, including those with smaller account sizes, to participate in the market.
By trading with less money, these traders can still gain exposure to leverage, making leveraged funds accessible and beneficial for a wider range of investors.
Let’s dig into what leveraged funds are and at the end, I’ll give you my simple strategy for trading these funds.
Always remain bullish and follow The Money Flow.
The Peters Report - Stock & Crypto Trader’s Resource
-GP a.k.a Fullauto11
Looking for a group of likeminded people to trade with? Text alerts and the MFG Discord. Text GP 1-936-661-7786 or email GP fullauto11@gmail.com to join.
Understanding Leveraged Funds & GP’s Trading Strategy for These Funds
What are these funds and why trade them?
Leveraged funds are financial instruments designed to amplify the returns of an underlying index or asset.
They are popular among active traders looking to capitalize on short-term movements in the market.
This article will dig into leveraged ETFs and leveraged ETNs, and highlight the key differences between these two types of funds.
Towards the end of the letter, I’m going to share with one of the strategies from the Money Flow Trading System’s Playbook for trading leveraged funds.
I. Why is Trading Leveraged Funds Important?
Trading leveraged funds can be a great strategy for sophisticated traders who have a solid understanding of market dynamics and risk management.
Here are some key points highlighting the importance of trading leveraged funds:
Amplified Returns: Leveraged funds offer the potential to significantly amplify returns on a given investment. By using leverage, these funds can deliver multiple times the daily performance of an underlying index or asset, allowing traders to capitalize on short-term market movements more effectively.
Diverse Strategies: Leveraged funds are versatile and provide opportunities to employ various trading strategies, including hedging, speculation, and tactical asset allocation.
Access to Leverage: Leveraged funds allow traders to gain exposure to leveraged returns without the need for a margin account or direct borrowing. This can simplify the process of leveraging investments and make it more accessible.
Market Efficiency: For those who have the expertise, leveraged funds can be used to exploit market inefficiencies and short-term trends. This can enhance overall portfolio performance, especially in volatile markets.
II. What is a Leveraged Fund?
A leveraged fund is a type of investment fund that uses financial derivatives and debt to amplify the returns of an underlying index or asset.
These funds aim to achieve a multiple of the performance of the index they track, such as 2x or 3x the daily returns. While they offer the potential for higher returns, they also come with higher risks.
Key Points About Leveraged Funds:
Objective: To provide amplified returns based on the performance of an underlying index or asset.
Short-term Focus: Designed for short-term trading rather than long-term investing due to the daily reset feature.
Higher Risk: Use of leverage increases potential for both higher returns and larger losses.
Types: Includes both leveraged and inverse leveraged funds, which aim to provide the opposite performance of the index.
III. Leveraged ETFs (Exchange-Traded Funds)
Leveraged ETFs are investment funds that hold a portfolio of securities and use derivatives like futures, options, and swaps to achieve their leveraged exposure. Key characteristics include:
Structure: ETFs hold a basket of assets and aim to amplify the daily performance of an underlying index.
Dividends: They can pay dividends if the underlying assets generate income.
No Credit Risk: ETFs do not carry the credit risk of a single issuer since their value is based on the underlying assets.
Tax Efficiency: Generally more tax-efficient due to their structure, minimizing capital gains distributions.
No Maturity Date: ETFs can be held indefinitely.
There are many investment management companies that offer leveraged funds and are worth digging into and becoming familiar with.
If you have been in the MFG for a long time, then you probably know my favorite leveraged fund to trade is 3x leveraged utilities UTSL UTSL 0.00%↑ by Direxion.
To view a current list of Direxion’s leveraged and inverse ETFs CLICK HERE.
These 2-3x funds are also provided by MicroSectors, Defiance, ProShares, GraniteShares, and REX Shares.
Below is Direxion’s Daily TSLA 2X Bull Shares ETF TSLL TSLL 0.00%↑ which was currently in a stage 1 accumulation zone this past week.
IV. Leveraged ETNs (Exchange-Traded Notes)
Leveraged ETNs are unsecured debt securities issued by financial institutions. They do not hold underlying assets, but promise to pay a return based on the performance of an index, adjusted for leverage. Here are some key characteristics:
Structure: ETNs are debt instruments that use derivatives to achieve leveraged exposure.
No Dividends: Typically do not pay dividends as they are debt securities.
Credit Risk: ETNs carry the credit risk of the issuing financial institution. If the issuer defaults, investors may lose their principal.
Tax Treatment: Tax treatment can be different and often less favorable, with income possibly treated as ordinary income.
Maturity Date: ETNs have a fixed maturity date, at which point the issuer pays out the value of the note.
V. Key Differences Between Leveraged ETFs & Leveraged ETNs
Understanding the differences between leveraged ETFs and ETNs is crucial for traders:
Structure:
ETF: Holds a portfolio of underlying assets.
ETN: Is a debt security with no underlying assets.
Risk:
ETF: No issuer credit risk.
ETN: Subject to issuer credit risk.
Dividends:
ETF: Can pay dividends.
ETN: Does not pay dividends.
Tax Efficiency:
ETF: Generally more tax-efficient.
ETN: Potentially less favorable tax treatment.
Maturity:
ETF: No maturity date.
ETN: Has a fixed maturity date.
VI: GP’s Leveraged Funds Trading Strategy
Leveraged funds offer traders the potential for amplified returns; however, they come with higher risks and complexities.
Understanding the structure, risks, and differences between ETFs and ETNs is essential for making informed trading decisions.
Leveraged ETFs provide a way to gain amplified exposure without credit risk, while leveraged ETNs offer a similar advantage with the added consideration of issuer credit risk.
Both can be valuable tools for active traders seeking short-term gains, but they require careful consideration and understanding.
Typically, leveraged funds are traded in the short-term, but I have developed my own strategy for trading around core positions. Let’s get into how I buy and sell these funds and hold them over the long-term.