Leveraged ETF offer an easy way for retail investor to apply leverage to their portfolio without the use of Options or Margin. While the benefit of the upside to leverage is understood, it’s more important to us to understand the downside and potential risk. In this post, we explore 2 recent market declines of 2020 & 2022 to help you see if utilizing leveraged ETF is right for you.
Keeping things simple, we opt to look at 2x leverage for S&P 500 and will not explore 3x leverage funds. We choose to compare SSO & SPY from the peak of the market in 2020 and 2022. There are 3 questions we attempt to answer.
- Does leveraged ETF fall faster than non-levered ETF?
- Does leveraged ETF fall as much as expected ? For example, if SPY falls 10%, SSO should fall 20%.
- Does leveraged ETF take longer to recover to recent high?