Leveraged ETF - Technical questions, and seeking swinging/strategy critique

Hey folks,

As a relatively newer trader (started with basic investing a little over a year ago, only dove into trading and options a few months ago), Ive been trying various strategies, and would like some help better understanding the pros and cons of my current strategy, trading leveraged ETFs, as well as technical elements of them.

My focus, until I have a better understanding of technicals and ability to execute profitably consistently, is more swing trading than scalp or day trading. I figured swinging leveraged ETFs after dips was a good middle ground regarding risk/leverage, somewhere between shares and options, and doesn’t require the work that is required of looking through many individual stocks.

Ive had some success with buying each of the 3 dips this month (TQQQ) and holding for a couple/few days of recovery, somewhere in the ballpark of 10-15% each time.

This strategy was very quickly shot down in trading floor, and I’d like to know why there was such strong opinion against touching leveraged ETFs (I do understand that longer term holding will make you worse off due to the down swings - I’m strictly talking a day or a few days of holding, like one might hold a SPY call for leveraging when thinking SPY will climb).

It was also mentioned that another element of leveraged ETF risk is due to their daily rebalancing, which leads me to another couple, more technical questions:

  • At what point in the day does this rebalancing occur?
  • How, if at all, does daily rebalancing affect the risk of holding the fund’s shares overnight?
  • How does extended hours trading occur on the leveraged ETF? Is it still moving according to the underlying ETF, is that price action due to trading of the leveraged ETF shares, or both?

Thanks in advance!

Leveraged ETFs are better for day trading and scalping because of the leverage (obviously) but with that comes with added volatility is it’s worse for longer term trades.

1 Like

This is an old article, but let me link you to something that partially breaks down how the leveraging process works. It should also give you an idea of what happens during the overnight process: Leveraged ETF Rebalancing: An ETF Database Guide

There are two key problems with a leveraged ETF. One is below (quoted from the article I linked):

It is this rebalancing process that creates the potential for divergent results if leveraged funds are held for multiple trading sessions. Because long leveraged ETFs increase exposure after a gain and decrease exposure after a loss, a seesawing market can result in return erosion, since leveraged ETFs would effectively be increasing exposure ahead of a losing session and decreasing exposure ahead of a winning session.

The 2nd is the possibility of splits or reverse splitting at some point which impacts what you’re holding and your subsequent profitability. I had this happen to me when JNUG reverse split on me last year. SOXL has also split this year, so something else to keep in mind.

1 Like

Yeah, I understand that holding long term will cause you to see more downside than holding the non-leveraged fund it tracks. That would be* why I am swinging it for a day up to a week, depending on how it’s moving. Thank you.

Thank you for the share, that was a helpful read, especially about the rebalancing process. Ill be sure to plan for brief holds if and when I play these again.