Investments in Ultra ETF
Ultra ETF by most characteristics is similar to normal ETF but there is one main difference: if Ultra ETF follows the same index as normal ETF does, it makes it twice. For example, if normal ETF follows index that moves up that day by 2%, its value also increases by 2%, but the value of Ultra ETF increases 4%, because Ultra ETF doubles the result with help of derivatives.
Ultra ETFs may sound very attractive if you think that you may get leverage without additional expenses for interest payments, but that is wrong impression. Ultra ETF doubles the daily return, but it will not make exactly double return over longer period. It’s just mathematics; you can try to calculate some situations by yourself.
The thing is that Ultra ETF in flat over longer run but volatile market will have a negative return even if index will show small positive result. That’s the reason why Ultra ETFs are not suitable for long term investment (despite higher than regular fees). We could say that Ultra ETFs can be used for short term investment strategies if you believe in some market very strongly, but that would depend on trading fees. In conclusion, if you are beginner at investing you should not choose any Ultra ETF.
