An ultra ETF is a type of exchange traded fund that aims to provide better returns than your average ETF. It utilizes leverage in order to amplify the movement in the market. By doing this, the hope is that investors in ETF will be able to realize double the gains that they would ordinarily be able to receive by investing in a similar ETF. ETF managers borrow money in order to increase the amount of shares of a security that they are able to purchase. This has the potential to increase the amount of profit for the fund by using other people's money.

Advantages

The big advantage of investing in this type of ETF is that you can get bigger returns. Many people like the safety of investing in an ETF that tracks a financial index because they know that the market will always tend to increase in value over the long run. However, the returns that are generally presented by tracking an index may not be good enough for some investors. For those individuals that like a certain level of safety but want bigger returns, the ultra ETF fills that need. 

Another advantage of investing in this type of security is that you can devote a smaller portion of your portfolio to it in order to get the same results. For example, you only have to put five percent of your portfolio into an ultra ETF to get the same results that you could by putting 10 percent into a traditional ETF. This allows you to put more of your money into other asset classes and diversify your portfolio better.

Disadvantages

One of the disadvantages of investing in an ultra ETF is that losses are amplified as well. When the market decreases in value, the value of your ETF shares will decrease twice as fast as normal. This means that when the value of the market declines rapidly, you could be in for some substantial losses. If you are a short-term investor, this could be devastating to your account.

Another potential disadvantage of investing in the ultra ETF is that it requires a great deal of volume in the market in order to work. Most of the time, when the market is slow, the ultra ETF may not be able to achieve double the returns of the underlying asset. This can make it similar to a traditional ETF during slow times.

When you invest in an ultra ETF, you will also have to take into consideration the costs that are involved. Even though these are not as actively managed as mutual funds, there is still a level of management involved. You have to pay in order to gain access to this level of professional money management.

blog comments powered by Disqus
Scottrade