Most investors by now have heard of exchange traded funds, or ETFs. These funds have substantially lower management fees compared to mutual funds, and are traded just like a stock on the open market. This article will explain what classifies an ETF as "Ultra" and will explain how you can use them to better your investment portfolio.
Ultra ETFs Explained
First thing is first, what makes an ETF Ultra? An ETF is classified as Ultra when it integrates leverage with an effort to achieve double the return of its set benchmark. For example, if say XXX ETF is designed to match the return of the XXX index or 1x, well the Ultra form of that ETF would be designed to perform double that return, or 2x.
The first Ultra ETF was launched actually in 2006, and they have been becoming pretty popular since. The funds don't guarantee double the performance, but it is pretty darn close. One important thing to note about Ultra ETFs is that their management fees are almost always higher than a regular ETF. Most Ultra ETFs charge 0.95% of total assets per year.
Examples of Ultra ETFs
The most popular Ultra ETFs are with major index funds. Some examples of well knwon Ultra ETFs include:
- NASDAQ 100 Long, ticker QLD, which is 2x the long
- NASDAQ 100 Short, ticker QID, which is 2x the short
- Dow 30 Long, ticker DDM, 2x long
- Dow 30 Short, ticker DXD, 2x short
- S&P 500 Long, ticker SSO, 2x long
- S&P 500 Short, ticker SDS, 2x short
Ultra ETFs, or any ETF for that matter trades exactly like a stock, so it is designated with a stock ticker or ticker symbol which is its unique ID tag for the market. Go to any site offering free stock quotes and you can pull up the latest quote for any given ETF just like you would a stock.
Ultra ETF Strategy
For the regular investor with a diversified portfolio, Ultra ETFs allow traders a way to gain extra exposure with less capital. For example, if you place 3% of your portfolio in an Ultra ETF, you will realize 6% exposure due to the leveraged returns of the fund.
For the institutional sized investor or standard money manager, these ETFs can be great hedges, or insurance to lower risk, against positions elsewhere. For simplicity sake if you have 80% of your portfolio all in long positions in technology based companies, to lower your downside risk you could purchase shares of the QID, which is the double inverse (2x short) of the NASDAQ 100 index.
Either way you look at using Ultra ETFs as a part of your investment strategy, you have to take into consideration the added volatility, or movement of the price, the fund sees on a daily basis. This can be a great asset or a big negative. Short term investors could more easily maximize their value in an Ultra ETF versus say a long term investor.
The Bottom Line
Ultra ETFs are ETFs that perform double the benchmark of the index that is being tracked. First seen in 2006, they have become increasingly popular throughout the stock market.
Fees are almost always higher at 0.95% of total assets per year, but depending on your investment strategy can be well worth the higher cost. The most popular Ultra ETFs track the major indices such as the NASDAQ 100, S&P 500, and the Dow Jones Industrials.
Ultra ETFs sound good except the higher fees. You have piqued my curiosity, I will be tracking a few from now on.
I had never heard of ultra ETFs. Thanks for pointing these out Blain.
Have you ever heard of being billed the dividend for shorting a stock? Do we pay the dividend on the short ETF's, double dividends on ultra short ETF? I saw that question on Mad Money about the dividends on shorting.
Hi,
I've been using Profunds ultras for years and was glad to see they converted to etfs. If you really want to juice your returns, there are 2.5x funds from direxion as well. I have plenty of alternative investment class stuff like this posted; feel free to visit.
Dan at Everydayfinance
Blain, ETFS are interesting but I'm afraid that most will die. Most will need at least 50 million in assets to turn a profit for the companies that sponsor them. According to the American Stock Exchange, 249 ETFS have less than that!
ETFS' short life span is due to the fact that theyre thrown onto the exchange with lack of history performance and only in 3 million in seed capital.
Blain,
Would you be interested in speaking on an ETF Summit to be held in NYC at the end of June?
Thanks for the great list of shorts. Just what I was looking for. Perhaps how is a great time to short the market.
i was never a fan of etfs to be honest. i find tem too leveraged for my personal taste. I rather invest with equities and buying options as insurance.