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Massive Gains in Leveraged ETFs | Battle Royale SSO vs SPUU and SPXL vs UPRO - YouTube
Channel: Adventurous Investor
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I’ve been having so much fun digging into
leveraged ETFs that I wanted to bring you
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a video with 4X the content. If it’s
4X the content, does that make this a
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leveraged video? *shifty eyes?* It’s
4X the content because there are
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four - count em - four - S&P 500 leveraged ETFs
for investors to choose from. I’m Skyler James,
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welcome back to the channel. Here are the
tickers: SPXL and UPRO are 3X bull ETFs,
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and SSO and SPUU are 2X S&P 500 ETFs. What are
the differences and which one would I be choosing
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to maximize my profits? I’ll tell you here
shortly. And remember, leveraged ETFs aren’t
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for everyone. These are high-level investment
tactics that come with more risk and potentially
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more reward than standard ETFs. Prepare
yourself before you jump into anything.
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If you’re a subscriber, you know I approach
leveraged ETFs the same way each and every
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time - regardless of the niche or sector. And if
you’re new to the channel and not a subscriber,
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hit that subscribe button, join us as we
discuss topics like this, easy-to-digest,
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educational topics centered around investing
and business and the markets as a whole.
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The first question I ask about leveraged
ETFs every time: do the underlying holdings
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of this ETF have strong macroeconomic
tailwinds behind them? Believe it or not,
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this is a really challenging question to
answer regarding the S&P 500 and leveraged
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ETFs. Because the S&P 500 involves such
a broad set of holding! When we looked at
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semiconductors with SOXL or cybersecurity
with UCYB, it was pretty easy to say “oh yeah,
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these companies are going to be more important
in the coming decades than they are today,
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generating more revenue than they are
today.” But do the companies in the S&P
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500 have a common thread? What’s the thread? It’s
nothing really! Just market cap! Just the size of
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the company! Johnson and Johnson and Tesla aren’t
in the same niche. Valero and Applied Materials
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share virtually no connection. The S&P 500 is
agnostic to industry and it makes predicting
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its future movements more challenging.
So what are your tailwinds for an investing theme
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like the 500? Two words: Creative. Destruction.
Creative destruction is the answer. Joseph
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Schumpeter gifted us this phrase way back in 1942.
It's the idea that new technologies are actively
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replacing old ones, and that new companies are
racing to take market share from existing ones.
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This concept is the core reason the S&P 500 is
such a powerful investment strategy. New, stronger
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companies replace the antiquated fading ones. All
the while, the index itself marches higher.
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Process these facts, in the fifteen years since
Google entered the 500, its share price is up
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almost 1300 percent. But Exxon Mobil - which was
the largest company in the 500 at the time Google
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first entered - has risen only four percent in
that same amount of time. FOUR percent! Since
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2006! Compared to 1300 percent! Stock picking
isn’t easy. Are you wondering how S&P 500 index
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holders fared since March of 2006? Well, they’d
be up 250 percent. Note that none of these numbers
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factor in dividend revinestments, and we’re not
talking about leverage here just the S&P 500,
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but the point remains: Exxon was dethroned as the
largest company, but holders of the index still
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made money. Lots of it. And it’s because Exxon
was replaced by larger, stronger companies. So
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the macro tailwind for the 500 - as I see it
- is this process of creative destruction.
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This eternal churning of bad businesses out and
strong businesses in. That's how we’ll answer
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question one about these leveraged ETFs.
Question two when deciding on a leveraged ETF: is
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the underlying index, the unleveraged version of
the S&P 500, a place where you would invest money?
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Of course it is! It’s the S&P 500! It is the most
tried and true investing strategy in existence!
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Think of the wisdom of ultra-wealthy Warren
Buffet. He said never bet against America. And
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that buying the S&P 500 is “buying America.” He
also said people like me and you don’t buy the S&P
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because nobody likes “getting rich slowly.”
Ok Warren, how ‘bout this: If the S&P 500 gets me
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rich slowly, what happens if I 3X it? Now
we’re getting somewhere! So question two,
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is the underlying investing thesis
solid? You bet. Orr uh you invest.
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That sounds more like it, no gambling here!
Whichever.. term you want. Time in the S&P 500 is
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one of the best ways for investors to generate
a return. Don’t try to justify it with why
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or how: just be there for the long haul.
And the third question for leveraged ETF holders:
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are you willing to hold on through all the
downturns? I won’t spend much time here,
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I’ve got deeper insight in my TQQQ video and
other leveraged pieces in my channel, I’ll
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give you some links at the end of this video. But
know that holding a leveraged ETF for the medium
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to long term requires an iron stomach. It requires
holding tight through the downturns. It requires
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hitting the like button right now. Naw I’m just
kidding but I do like seeing those thumbs up!
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Remember, the psychology of selling low is
overwhelming, and investors will get burned hard
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if they sell during a market crash.
So those are the three questions: What are the
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tailwinds? Which we said was creative destruction,
basically the DNA of the index. Is the underlying
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index investable? You bet it is, it’s the most
widely accepted investment strategy in existence.
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And will you have the stomach to hold on as those
roller coasters we call leveraged ETFs drop steep
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and fast? That’s for you to decide.
So what are the specific options for
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leveraged S&P 500 ETFs? There are four total, two
are 2X, two are 3X. Two are issued by Proshares,
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two by Direxion. If you’re new to this arena,
just know these two ETF issuers - Proshares and
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Direxion - specialize in leveraged ETFs. They’re
kind of the household name of leveraged ETFs.
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Let me show you the 2X’s first. SSO from
Proshares was the very first leveraged ETF.
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It’s been trading since 2006, has 5
billion dollars in AUM and costs investors
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point nine one percent in fees annually. SSO’s
competitor - SPUU from Direxion - has just never..
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really.. taken off. There’s not really any other
way to say it. Since debuting seven years ago,
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it’s only netted 56 million in AUM. Pretty
stunning when you consider it’s 27 basis points
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cheaper than its competitor SSO. What gives? Well
it’s probably that these leveraged ETFs are used
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by day and swing traders. People looking to move
in and out of a position quickly based on custom
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metrics and breaking news. Liquidity is vital
to day traders. The difference in expense ratio
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for these ETFs doesn’t matter to day traders
because the bid-ask spread on SPUU becomes so
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large that it negates the savings in cost. That’s
probably why SPUU has never built a base.
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Let’s look at performance. How have these two
performed? They’ve both returned about 28 to
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29 percent annually for the last five years. Not
bad. Remember that as a long term investor using
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these leveraged ETFs, we’re hoping to see outsized
gains in exchange for this higher volatility,
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higher risk and higher expense ratio, right?
As an example, let’s take a look at the
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performance of The Q’s - an unleveraged ETF
covering the Nasdaq 100. For only 20 basis
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points and without the 3X downside risk, it’s
returned nearly identical numbers as SSO and SPUU
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over the last five years. That’s not to say that
these 2X S&P 500 ETFs aren’t worth investing in,
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simply worth noting how they compare
to other investment choices.
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Between the two, I would choose SSO. The low
volume, lower aum and large bid-ask spread of SPUU
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make it too risky for me to purchase and utilize.
Think about a volatile moment in the market.
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Trying to sell your shares of SPUU will be
like trying to swim with a cinderblock tied
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to your foot. It’s going to be extra difficult
and extra stressful. SSO for the win.
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Thankfully the 3X leveraged ETFs for the S&P 500
are a bit more comparable in what they offer.
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They’ve both been trading for ten
plus years, with comparable AUM,
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expense ratios, and bid-ask spreads. And they
have nearly identical returns. If I had to pick
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just one, I would take UPRO simply for the lower
expense ratio. But the difference in expense ratio
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is less than ten percent and I wouldn’t fault
an investor for choosing SPXL instead.
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Let’s put everything we learned in a nice neat
wrapper. We said SSO is the oldest leveraged ETF
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and by all accounts a great product. While
SPUU is a 2X red flag. And choosing UPRO
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and SPXL are like two sides of the same
coin - they’re basically identical.
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If you’re looking for more
ETF or leveraged investing,
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there’s a great playlist right here!
So let me know, where are you putting your
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coin? Tell us in the comments. Thanks for
watching and I’ll see you on the next one!!!!
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