I am sure that all of you know that we had a market pullback last week. Dow Jones Industrial Averages lost about 700 points in a week. Although the market has rebounded yesterday, we can expect high volatility in the next couple of days.

I heard that some people are buying leveraged bull ETFs in this pullback. Their rationale is that we are still in a bull market. This is only a temporary pullback. The market should make a new high soon. By buying leveraged ETFs, they hope to double or triple their profits.

For those who don’t know about leveraged ETF, you can read our previous posting, Leveraged ETF = Getting Rich Quickly. A leveraged ETF is basically a financial derivative that amplifies the return of the underlying index. For example, SSO is a double (2x) leverage ETF of S&P 500 from ProShares. It means, when S&P 500 goes up 1% on a single day; this ETF goes up 2% in price. On the other hand, when S&P drops 2%, this ETF drops 4%.

Should we buy leveraged ETFs? Personally, we had a bad experience with leveraged ETFs in the last market crash. Here is the story:

When leveraged ETFs are still pretty new to the market about 3 years ago, we bought them with a large amount of money. We didn’t do enough research. We didn’t even realize that it amplifies the underlying index on a daily basis. Then, it came market crash in 2008. That’s when we realize that this product is just garbage. As we pointed out in our previous posting, SSO lost –46% from 2006 to 2010; while the underlying index, S&P 500 lost only –11%.

Our recommendation, stay away from leveraged ETFs. It is not a good investment vehicle. If you want to do day-trading with them, it is up to you.

Link

• Leveraged ETF = Getting Rich Quickly