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What Are Leveraged ETFs?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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A leveraged ETF is a specific type of exchange-traded fund (ETF) that’s designed to amplify investment returns. With traditional ETFs, which are mutual funds that trade on an exchange like a stock, the aim is typically to match the performance of a benchmark index. Leveraged ETFs, on the other hand, seek to multiply the returns of a specific stock market index or asset class. In other words, it’s an active, rather than passive, investing approach.

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How do leveraged ETFs work

Traditional ETFs own shares of stock or other securities that represent all of the securities in the underlying indexes they track. So an ETF that tracks the S&P 500 Index, for example, would include shares of all of the companies in that index.

A leveraged ETF takes a different approach, relying on debt instruments and derivatives to boost investment returns based on the performance of an underlying index. A leveraged ETF can use any of the following investment strategies to achieve its goals:

  • Options
  • Futures
  • Swaps
  • Cash

2x and 3x leveraged ETFs

Leveraged ETFs typically use an amplification factor of two or three to magnify the gains of an underlying index. This means the ETF is buying two or three times the exposure to the index.

So a triple-leveraged ETF, or 3x leveraged ETF, would have a ratio of $1 of investors’ money for every $3 of debt. In theory, investing in a 3x ETF would then return a 3% gain for every 1% gain realized by the underlying index that the fund is attempting to outperform.

A 2x ETF, on the other hand, would use a leverage factor of two instead to double returns for investors. Remember, this is based on the returns of an underlying index within a specific trading window — typically one day — not the average annualized return of the index.

Inverse leveraged ETFs

Some leveraged ETFs can be inverse ETFs, meaning they attempt to amplify returns based on the opposite of how an index performs. So if you own a 3x ETF that’s inverse and the index it tracks sees returns drop by 3%, the ETF would return 9%. But if the index posts a positive return of 3%, then a 3x inverse leveraged ETF would drop by 9%. With an inverse leveraged ETF, the intent is to profit from declines in the index being tracked.

These funds can sometimes be referred to as bearish leveraged ETFs. The Direxion Daily S&P 500 Bear 3X Shares ETF, for example, offers 3x daily short leverage to the S&P 500 Index. This type of ETF might appeal to investors who have a bearish view of U.S. large-cap stocks in the short-term.

Which indexes do leveraged ETFs track?

Leveraged ETFs can be benchmarked against a number of stock market indexes. Some of the largest indexes that are often utilized for leveraged ETF trading include:

  • The S&P 500
  • The Dow Jones Industrial Average (DJIA)
  • The Nasdaq 100
  • The Russell 2000 Financial Services Index
  • The NYSE Arca Gold Miners Index
  • Dow Jones U.S. Oil & Gas Index

By tracking such a broad range of indexes, leveraged ETFs offer investors an opportunity to diversify investment gains beyond just stocks.

Some leveraged funds can also be sector- or asset class-specific. A leveraged gold ETF, for example, can deliver amplified daily or monthly returns on gold prices for investors who are looking to add precious metals exposure to their portfolios. A leveraged oil ETF seeks to do the same, only investors are swapping out oil prices for gold prices.

One important thing to note about leveraged ETFs and inverse leveraged ETFs is that they typically reset their exposure to the index they’re tracking daily. This means the objective of the ETF and its return multiplier can change each day. Some leveraged ETFs reset monthly but that’s less common.

Pros and cons of leveraged ETFs

Investing in leveraged ETFs can offer advantages and disadvantages. It’s important to weigh both sides to determine whether these investments are right for you.

Pros of investing in leveraged ETFs

  • Increased exposure: Leveraged ETFs allow you to increase exposure to an underlying index without making an additional capital investment.
  • Magnified upside: With leveraged ETFs, the upside is magnified so there’s a potential for much greater returns with this type of investment.
  • Highly liquid: Leveraged ETFs can be highly liquid investments so your money isn’t locked in for the long-term.
  • More accessible than other alternatives: These ETFs are more accessible to everyday investors compared to other stock alternatives.

Cons of investing in leveraged ETFs

  • Higher risk: While you could reap significantly higher returns with a leveraged ETF or inverse leveraged ETF, you’re also multiplying the risk factor.
  • Potential for tracking error: Tracking error occurs when a security’s price doesn’t follow the index it was meant to track, meaning you may not be able to bank on higher returns.
  • Costly: While traditional ETFs can offer very low expense ratios, leveraged ETFs are typically a more expensive investment option. For example, a typical ETF may have an expense ratio below 0.50% but a leveraged ETF may have an expense ratio as high as 3%.

Aside from those considerations, it’s important to note that investing in leveraged ETFs requires you to be hands-on when it comes to choosing which ETFs to invest in and making trades. This is not an investment approach that’s designed for the passive investor who’s hoping to remain hands-off with their portfolio.

If you don’t have the time or the patience to thoroughly research leveraged ETF investments and stay active with trading, then you could be setting yourself up for losses rather than gains.

How to use leveraged ETFs in your investing strategy

If you feel confident that leveraged ETFs are right for you, understand first that they make the most sense as part of a short-term investing strategy. If you need long-term diversification and index exposure, then you’re likely going to be better off with a traditional index mutual fund or ETF.

Before buying your first leveraged ETF, take time to research funds. Specifically, you should:

  • Determine which indexes or sectors you’re interested in gaining exposure to in your portfolio.
  • Review the fund’s prospectus to understand its objectives and how it attempts to achieve them.
  • Consider the fund’s historical performance trends, though do keep in mind that past performance is not an indicator of future returns.
  • Compare the performance of the underlying benchmark or index the ETF tracks.
  • Determine what percentage of your portfolio holdings you’re comfortable committing to leveraged ETFs.
  • Consider the costs involved, in terms of management fees and commissions.

When in doubt, it may be best to start small with investing in leveraged ETFs. You can then expand your position as you become more familiar with how these ETFs operate.

You may want to talk to your financial advisor about where leveraged ETFs fit into your overall investment plan. Your advisor can offer perspective on what leveraged ETFs can (or can’t) help you do when it comes to satisfying your investment objectives.

Most popular leveraged ETFs

If you need some direction on which leveraged ETFs to invest in, consider this leveraged ETF list and 3x ETF list, both of which include some of the most popular choices for investors.

Top leveraged ETFs for 2020

  • ProShares UltraPro Short QQQ (SQQQ)
  • ProShares UltraPro Short S&P 500 (SPXU)
  • ProShares UltraPro Short Dow30 (SDOW)
  • ProShares UltraPro Short Russell2000 (SRTY)
  • Direxion S&P 500 Bull 2x (SPUU)
  • ProShares UltraPro Short MidCap400 (SMDD)
  • ProShares UltraPro Short Financials (FINZ)
  • ProShares UltraPro Short Nasdaq Biotechnology (ZBIO)
  • iPath LX Russell 2000 TR Index ETN (RTLA)

Top 3x leveraged ETFs for 2020

  • Direxion Daily S&P 500 Bear 3X Shares (SPXS)
  • Direxion Daily Gold Miners Bull 3X Shares (NUGT)
  • Direxion Daily Small Cap Bear 3X Shares (TZA)
  • Direxion Daily Financial Bear 3X Shares (FAZ)
  • VelocityShares 3x Inverse Natural Gas (DGAZ)
  • Direxion Daily Real Estate Bear 3x Shares (DRV)
  • Direxion Daily 20-Year Treasury Bear 3X (TMV)
  • VelocityShares 3x Inverse Crude Oil ETN (DWT)
  • United States 3x Oil Fund (USOU)

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What is a Blind Trust and How Do You Set One Up?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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A blind trust allows you to grant control of your financial assets to another party, called a trustee, who manages them for you. There are a variety of trusts that serve different purposes; blind trusts are for people who need to avoid potential conflicts of interest that could arise between their work and their investments.

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What’s the difference between a blind trust and a normal trust?

The main difference between a blind trust and other trusts is that neither the grantor nor the beneficiary know where funds in the trust are invested, or have any real say in how they are being invested.

Every trust establishes a fiduciary relationship between someone who owns financial assets and someone who manages those assets. In most cases, when setting up a trust there are three parties involved:

  • The grantor: The person who owns the assets and creates the trust.
  • The trustee: A party chosen by the grantor to manage the trust.
  • The beneficiary: The party who is entitled to receive financial benefits from the trust.

In many trust arrangements, the trustee and grantor communicate regularly regarding the administration of a trust. The beneficiary is typically aware of what’s in the trust or at least what trust assets they’re entitled to.

In a blind trust, the trustee alone knows where funds in the trust are being invested. A blind trust is a way to limit the beneficiary’s knowledge about what’s held in trust and how those assets are managed, says Patrick Hicks, head of legal at online estate planning company Trust & Will.

How does a blind trust work?

An independent trustee manages blind trust assets on the grantor’s behalf. The named beneficiary or beneficiaries have no knowledge of what’s in the trust or what decisions the trustee makes with those assets. Meanwhile, the trustee isn’t required to report to the grantor regarding trust activity. In addition, the grantor of a blind trust may choose to remain anonymous.

This doesn’t mean the trustee can do whatever they like with trust assets, however. As with all trusts, the trustees are fiduciaries, which means they’re required to act in the best interests of the trust beneficiaries.

Revocable vs. irrevocable blind trust: What’s the difference?

A blind trust can be revocable or irrevocable. The difference between the two hinges on whether you can change the terms of the trust once it’s established.

  • Revocable blind trust: You have the power to change, revoke or terminate the trust at any time. For example, you may want to add assets to the trust while moving others out. Or name a different trustee or add beneficiaries to the trust.
  • Irrevocable blind trust: This version is permanent. Once you’ve established the blind trust, named the trustee and transferred assets to his or her control, you have no further ability to make changes to the trust terms.

Whether it makes sense to establish a revocable or irrevocable blind trust depends on your reasons for creating the trust. If you don’t anticipate making further changes, then an irrevocable trust could meet your needs. On the other hand, a revocable blind trust gives you flexibility if you think the trust terms might need to be amended down the line.

Who needs a blind trust?

Technically, anyone could set up a blind trust. But typically they’re only used in situations where people need to separate themselves from their assets. A common scenario where that might be necessary is to avoid professional conflicts of interest.

Publicly elected officials may choose to set up a blind trust. The Ethics in Government Act of 1978 requires government officials to disclose assets unless they’re held in a qualified blind trust. Transferring assets to a blind trust can help lawmakers and other government officials minimize the potential for conflicts of interest by keeping their political and financial lives separate to a degree.

Hicks offers an example using a publicly-elected judge. If the judge is overseeing a case that could impact the value of the company in which he or she is invested, that could present a conflict of interest if their decision could affect the value of said investment. A blind trust would offer a legal safety net against that conflict.

Corporate executives and individuals who serve on a board of directors may also consider a blind trust to hold assets to avoid a similar scenario. Doing so could help them sidestep any financial dealings that could possibly create a conflict of interest.

Corporate insiders are subject to federal regulations that prevent insider trading and other illegal activity. With a blind trust, the trustee would have authority to buy or sell shares of company stock held in the trust allowing the executive to avoid violating any federal trading guidelines.

I just won the lottery, do I need a blind trust?

A blind trust is something you might be interested in creating if you win the lottery. When you have a blind trust, lottery winnings can be claimed in the trust’s name instead of your own. That means you can stay anonymous, which is something you might prefer if you don’t want a lot of people knowing about your windfall.

This might only be possible to do if you live in a state that doesn’t require lottery winners to disclose their identity. As of 2020, these states have laws or lottery board policies that allow winners to stay anonymous:

  • Arizona (for prizes of $100,000 or more)
  • Delaware
  • Georgia (for prizes of $250,000 or more)
  • Kansas
  • Maryland
  • North Dakota
  • Ohio
  • South Carolina
  • Texas (for prizes of $1 million or more)
  • Virginia (for prizes of $10 million or more)

Aside from anonymity, a blind trust could also be helpful if you’re concerned about preserving your lottery winnings. By transferring the money into a trust, you can dictate when you and your beneficiaries should receive payouts.

How to set up a blind trust

The first step in setting up a blind trust is meeting with a qualified attorney, who can help you determine whether a blind trust is something you need and which laws in your state have to be observed for establishing one.

From there, you can go through the mechanics of creating and funding the trust, which includes:

  • Determining which assets will be placed in the trust.
  • Collecting relevant documents related to those assets, such as deeds to real estate or stock certificates.
  • Choosing an individual or financial institution, such as a wealth management firm, to act as trustee.
  • Deciding whether to create a revocable or irrevocable trust.
  • Drafting the trust document and funding the trust by transferring assets to it.

Depending on where you live, the trust document may need to be notarized and recorded with your register of deeds or another state agency for it to be completely legal.

Do you need a blind trust?

A blind trust can help shield you from conflicts of interest related to your finances. That may be important if you have a high-profile job in the public sector or a private sector role that’s heavily regulated. A blind trust can also be helpful in managing lottery winnings if you’d rather you keep your newfound wealth under wraps or put safeguards in place to protect those assets.

The main challenges of blind trusts are the cost as well as the lack of transparency and control. First, setting up the trust usually means paying the blind trust attorney’s fees, which could be substantial since this type of trust tends to be more complex than other trust options. Beyond that, there are ongoing costs associated with maintaining a trust, including the administrative fee paid to the trustee for their services. Hicks says the initial setup costs can run in the tens of thousands, while annual management fees can run as high as 3% of trust assets.

On the transparency and control side, your beneficiaries won’t know what the trustee is doing but then again, neither will you. That could make a blind trust less than ideal if you’re more of a hands-on type when it comes to managing your assets.

Bottom line, blind trusts can serve a specific purpose in estate planning. Talking to an estate planning attorney can help you decide whether establishing one is the right move.

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Stockpile Review: A No-Hassle Way to Give the Gift of Stock

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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Stockpile is an online investing platform that lets new investors build a portfolio using fractional shares. With fractional shares, you purchase only a small part of a single share of a publicly traded company. This approach provides big cost advantages, letting people invest with any amount of money. Especially when purchasing shares in some of the most popular companies traded today — like Google parent Alphabet Inc, which as of writing was trading above $1,400 a share.

Stockpile’s other marquee feature is the ability to give shares as a gift. You can purchase an e-gift card or physical gift card that’s redeemable for stock shares. It’s a great way to introduce kids to the building blocks of investing or simply gift stock to anyone.

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The Bottom Line: Stockpile is a good choice for novice or younger investors who want to build a stock portfolio using small amounts, or parents who want to gift stocks to young children or teens.

  • Invest any amount you want in the stock market, and pay a commission of only $0.99 per transaction, with no minimums or monthly fees.
  • Open a taxable investment account for yourself or a custodial account on behalf of your children.
  • You’ll need to look elsewhere for investing options beyond stocks and exchange-traded funds (ETFs).

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Who should consider Stockpile

Stockpile is best suited for beginning investors who are just dipping their toes into the market. The biggest selling point is that you don’t need a lot of money to invest, since you’re not buying full shares of stock.

You might want to invest in a big-name stock like Amazon Inc., which sells for over $1,800 a share as of writing. But you may only have $100 a month to invest.

At that rate, you’d need to wait well over a year to save up enough to buy a single share of Amazon, assuming the price stays the same. With fractional shares, you can invest $100 each month and work your way up to owning a full share of Amazon, one step at a time.

In that respect, it’s similar to some of the micro-investing apps that have grown popular, such as Acorns or Stash. These spare-change apps let you invest with small amounts as well. The difference is that they tend to focus on exchange-traded funds (ETFs) and prebuilt portfolios as their main investment too, rather than encouraging investors to buy fractional stock shares.

Stockpile allows you to invest in more than 1,000 U.S. companies, ETFs and foreign companies, including every component of the S&P 500. Many of the stocks are names that should be familiar to most people, including Amazon, Disney and Google. Investors pay $0.99 per trade to buy and sell shares.

Stockpile trading platform and tools

Stockpile’s trading platform is user-friendly in terms of how simple it is to use. You create your account, link your bank account and from there, you can begin buying stocks and ETFs.

You can manage your account online or through the Stockpile app, which is downloadable for Android and iPhone. The interface is streamlined and simple. You can use the app or go online to:

  • Buy stocks or ETFs
  • Track the performance of stocks and ETFs you’ve already purchased
  • Estimate an investment’s growth potential over time

It’s all very basic, which might appeal to an investor who feels overwhelmed with all the bells and whistles other trading platforms offer. On the other hand, a more advanced investor may be underwhelmed by the lack of features, such as real-time trading data, forecasting tools or an extensive library of stock and investment research.

In terms of customer service, Stockpile relies on online chat and email to communicate with investors. Phone support isn’t available but that’s one of the ways Stockpile tries to keep costs as low as possible for investors.

Stockpile investment options

With Stockpile, your investment options include:

  • Stocks
  • ETFs
  • ADRs, which are foreign stocks that trade on a U.S. exchange

That’s a good starting lineup for new investors, but that’s where the variety ends. A respectable number of publicly traded companies are available, but it’s a subset of the overall market. You won’t find other asset types here, like bonds, index funds, hedge funds, forex or other options.

In terms of fees, here’s what you’ll pay to trade:

  • $0.99 per trade to purchase stocks
  • $0.99 per trade to sell stocks

If you’re purchasing gift cards for stocks to give to someone else, here’s what you’ll pay:

  • $2.99 for the first stock, $0.99 for each additional stock
  • 3% debit/credit card processing fee
  • $4.95 to $7.95 fee for physical gift cards

It costs nothing to redeem a gift card purchased from Stockpile. There are also some miscellaneous fees to be aware of, including a $30 returned check fee, a $5 paper check fee and a $75 fee to transfer your account assets to another brokerage.

Investing for kids with Stockpile

While Stockpile can be used to invest for yourself, the platform was initially developed as a way to gift stocks to kids. If you’re a parent with young kids or teens, that’s something you might be interested in.

There are two steps you can take to help kids invest through the platform. The first is to purchase Stockpile gift cards, which can then be redeemed for stocks.

You don’t need an account to do this. All you do is:

  • Select the stock gift card you want to purchase
  • Choose a dollar amount (the maximum is $2,000 for printed or e-gift cards; maximum $100 for physical gift cards)
  • Decide whether you want to print out a paper receipt showing your certificate amount, email your gift card or choose a physical gift card
  • Pay for your stock gift card with a debit or credit card

Remember, you’ll pay a $2.99 fee, plus 3%. So for a $100 gift card purchase, the fee comes to $5.99. And if you’re requesting a physical gift card, you’ll pay an additional fee ranging from $4.95 to $7.95, depending on the card.

The second part of investing for kids with Stockpile is setting up a custodial account that stock gift cards can be redeemed into. A custodial account is technically owned by the adult on the account until the minor comes of age.

One interesting feature is that kids and teens can set up their own trades through the custodial account. They just have to be approved by the adult listed on the account for those trades to be executed. They can also create a wish list of stocks they’d like to own to share with family and friends for future gifts. It’s a hands-on way to get kids interested in and learning about how the stock market works.

Strengths of Stockpile

  • Low barrier to entry: Investing in a mutual fund at a traditional brokerage might require a minimum initial investment of anywhere from $500 to $10,000. Stockpile has no minimum requirements, making it an accessible way to start investing.
  • Ease of use: The online interface and mobile app are easy to navigate and not overwhelming for someone who’s new to investing online.
  • Fractional investing: While there are a number of micro-investing apps out there that allow for investing small amounts, not all of them offer fractional shares. Stockpile makes it possible for an investor with even a budget to own their favorite big-name stocks.
  • No monthly fees or annual fees: At other online brokerages or robo-advisors, you might pay a monthly or annual management fee. Stockpile has no monthly or annual fees.

Drawbacks of Stockpile

  • Limited selection: While Stockpile offers more than 1,000 stocks and ETFs, other brokerages have a much wider variety. E-Trade, for example, offers stocks, bonds, mutual funds, futures, options, ETFs and prebuilt portfolios.
  • Trades aren’t free: At first glance, $0.99 per trade doesn’t seem like much. But when you consider that other brokerages now charge $0 commissions on stock trades, frequent trading could add up.
  • No retirement accounts: Currently, you can only open an individual or custodial taxable account with Stockpile. Joint accounts and IRAs aren’t an option.
  • Limited research tools: If you download the Stockpile app, you’ll have access to mini-lessons on investing and performance charts for individual stocks. But in the way of research, that’s about it, which may be disappointing to some investors.

Is Stockpile safe?

This is always a good question to ask when investing online and the answer is yes. Stockpile is registered with the SEC and is a member of FINRA and SIPC. Being a SIPC member means your account is insured for up to $500,000, including up to $100,000 of cash, in the event that the company goes under. You’re not, however, insured against losses due to market fluctuations.

In terms of internet security, Stockpile encrypts and protects investors’ personal information, including your Social Security number.

Is Stockpile right for you?

Stockpile offers a no-frills way to start investing in stock using fractional shares and to gift stocks to friends and family members. No minimums and no monthly fees might appeal to investors who want a budget-friendly way to start building a portfolio. That should be weighed against the $0.99 per trade fee and the overall range of investment options.

Stockpile could be a great place to get your feet wet with purchasing stocks or teaching kids and teens the basics of investing. But if you have an interest in more advanced trading strategies or you want to open an account to invest for retirement, another online brokerage could be better suited to your needs.

Fees mentioned in the article are accurate as of the date of publishing.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.