Is This Leveraged ETF The Way To Go?

It’s not too often we’re surprised by our data.

Yet, when we looked at all the leveraged ETF searches by financial pros, we didn’t see one for the Ultra S&P 500 (SSO).

That was exceptionally odd considering Nasdaq 100 leveraged ETFs made up the top two searches.

But no one could spare one pageview for a leveraged S&P 500 ETF?

Make no mistake about it. Utilizing leverage is one way to grow wealth faster. It’s why so many investors are attracted to real estate. And why so many traders jump into options. 

Because let’s face it. Almost half of American families have no retirement savings. In other words, utilizing leveraged investments might be their only chance to catch up and become financially free. 

And while real estate and options trading are two of the most popular tools to gain leverage, equity traders and investors can gain leverage via exchange-traded funds. 

In fact, there are ETFs and ETNs available right now which can give you 2x and 3x leverage. 

For example, the ProShares Ultra S&P 500 is a leveraged ETF that seeks to 2x the daily performance of the S&P 500.

Ultra S&P 500 (SSO)

The SSO is a leveraged ETF that seeks a return of twice the S&P 500 single-day movement, which is measured by the end of day Net Asset Value with daily resets. 

Why does this matter?

Because of the compounding returns. Holding periods of greater than one day can result in significantly different returns than the target return. 

As you can see, the relationship does not work if you extend the holding period beyond one day. 

Here is a visual representation:

SSO is up over 148% over the last five years, while the SPY is up 86% during the same period. 

But from a single day basis, the 2x leverage is fairly accurate:

What’s In SSO?

SSO is heavily weighted in healthcare and consumer discretionary. But its greatest sector exposure is in information technology, as it’s 28.02% of the ETFs weighting. 

Apple, Microsoft, and Amazon.com are among the highest-weighted stocks in the ETF.

Who Is SSO For?

SSO is an excellent option for day traders who want an alternative to the expense SPY ETF. 

For example, the SPY closed at $411.22 on June 8, 2022. You’d need over $41K to buy 100 shares. 

On the other hand, SSO closed at $53.40 on the same date. 100 shares of SSO only costs $5,340. The SPY is nearly 8x as expensive as SSO. But SSO is 2x as volatile. 

If you’re bullish on the S&P 500 then you can see how useful SSO can be. 

SSO is actively traded at approximately 6.6 million shares per day. But that is peanuts compared to the SPY which trades an average of 100 million shares per day. 

How About Long-Term Investing In SSO?

SSO attempts to double the return of its underlying benchmark for a single day. And due to the compounding of daily returns, holding periods beyond one day can result in unpredictable numbers. 

However, even if the returns aren’t 2x if you decide to hold long-term, it doesn’t mean that it’s a bad investment. 

For example, over the last ten years, SSO returned 24.56% annually, while the SPY returned 14.33% during that same period. 

Of course, 2x also means 2x the losses, as we’ve seen in 2022. While the SPY  is down 12% YTD, SSO is down 25% YTD.

In other words, investing in SSO requires a strong stomach for volatility. 

Depending on what stage you’re in life, investing in SSO might not be suitable. In 2020, SSO experienced a 3-month 40% drawdown. 

SSO still has significantly outperformed SPY over the years. SSO is a solid long-term investment if you have a high-risk appetite. Even though we can’t expect 2x the returns in the long run. 

The Costs To Play 

ETFs are not free. They typically charge an expense ratio. SSO is no different, it charges an expense ratio of 0.89%. Compared to the SPY it is significantly larger, at 0.09%. It’s even higher than ARKK, an actively managed ETF that charges an expense ratio of 0.75%. 

SSO does pay its shareholders a $0.13 dividend, which is approximately 0.25%. 

Our Opinion 8/10

SSO is a cheaper, higher risk/higher reward alternative to the SPY. While the leverage has stung in 2022, down 25% YTD, long-term the stock market has proven to be a worthwhile buy. 

And with it down as much as it is, we believe SSO is worth accumulating, even if the market hasn’t experienced a bottom yet. If you’re bullish on the United States economy in the long-term, then SSO is a buy at these levels.