5 Potential Investing Blunders

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Investing Mistake #3: Holding leveraged ETFs for more than a brief trade.

Leveraged exchange-traded funds, an increasingly popular investment,
are designed to return double or even triple the movement in a specific index, be it a broad index such as the S&P 500 or
a more specific sector such as the ETFs.html">energy
sector or financial sector.

I have no problem with these if you are willing to accept the risk and volatility, and as long as you don’t hang on to them
for too long. Why? After a couple of weeks, their financing costs start to eat you up.

Here’s a good example: One leveraged ETF that we’ve talked about recently in Profitable Investing is the ProShares
UltraShort S&P 500 Fund (SDS).

This “double bear” exchange-traded fund is an inverse fund, designed to return approximately 2% on days when the S&P 500
index falls 1%. Over the long run, because of the cost of financing the fund’s short positions, the 2:1 advantage gradually erodes,
even in a falling market. And, of course, if the market continues to rise, the fund’s share price will drop approximately twice
as fast as the S&P.

If you’re inclined to trade them separately, just make sure you don’t hold them for too long in an attempt to make up some of
the money you may have lost. It will end up costing you in the long run.

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