Reasons to Invest in SPXL and Counterarguments
In the dynamic world of financial investments, the Direxion Daily S&P 500 Bull 3X Shares (SPXL) has garnered attention for its promise to triple the daily performance of the S&P 500. However, this triple-leveraged Exchange Traded Fund (ETF) comes with several long-term risks that make it more suitable for short-term tactical trading rather than as a long-term investment vehicle.
One of the primary concerns is volatility decay. Triple-leveraged ETFs, like SPXL, reset their leverage daily, which means their returns can deviate significantly from the intended three times the index's performance over longer periods. This effect, known as volatility decay, results in actual returns being lower than expected in volatile markets.
Another risk is compounding losses. During market downturns, SPXL can experience severe losses. For instance, if the S&P 500 declines, SPXL could fall three times as much, potentially leading to substantial drops in value. Even in a flat market, the compounding effect of daily leverage resets can lead to losses over time.
High expense ratios are another drawback. Leveraged ETFs typically have higher expense ratios compared to traditional ETFs, which can erode returns over the long term. For SPXL, the expense ratio is around 1%, significantly higher than many non-leveraged ETFs.
The daily rebalancing mechanism means that SPXL does not guarantee to provide exactly three times the S&P 500's longer-term returns. This tracking error can be substantial, especially in choppy markets. Moreover, the ETF's volatility can amplify losses during downturns, making the investment highly volatile and risky for long-term portfolio sustainability.
John Bogle, the founder of The Vanguard Group, advocated for investing in a low-cost index fund that tracks the S&P 500. He considered leveraged ETFs like SPXL to be "gambling" tools and concluded that their creation sense was beyond his comprehension. In the eyes of experienced investors, leveraged ETFs like SPXL are incredibly risky investments.
Despite its high volatility, SPXL has gained attention on social media channels recently. However, it is essential to remember that while SPXL might outperform the S&P 500 over a few days, it also triples the S&P 500's daily losses. A single market downturn could wipe out the gains made by SPXL, potentially burning inexperienced investors.
For long-term investors seeking stable growth, non-leveraged ETFs like the Vanguard S&P 500 Index Fund (VFIAX) and Vanguard S&P 500 ETF (VOO) remain popular choices. Bogle once stated that "what may work for the few cannot work for the many" and warned against speculation in a portfolio.
In conclusion, while SPXL might appeal to day and swing traders due to its high trading volume of nearly 6.2 million shares, it is crucial for long-term investors to be mindful of the inherent risks associated with triple-leveraged ETFs.
- The high volatility of the Direxion Daily S&P 500 Bull 3X Shares (SPXL) makes it more suitable for day traders and swing traders rather than long-term investors, given the risk of substantial losses due to compounding losses and volatility decay.
- With a high expense ratio of about 1%, the Direxion Daily S&P 500 Bull 3X Shares (SPXL) is considered to have higher fees compared to traditional ETFs, which may erode returns over the long term for investors.
- contrasting the inherent risks of leveraged ETFs like SPXL, John Bogle, the founder of The Vanguard Group, advocated for investing in low-cost index funds like the Vanguard S&P 500 Index Fund (VFIAX) and Vanguard S&P 500 ETF (VOO) for long-term investors seeking stable growth.
