Tag: leveraged ETFs

  • UGAZ Stock and DGAZ Stock The Differences and Relations

    UGAZ Stock and DGAZ Stock The Differences and Relations

    UGAZ Stock and DGAZ Stock The Differences and Relations
    The principal objective of UGAZ is to increase the daily performance of UNG by 3 times. The main objective of DGAZ is to produce profits from the losses in the UNG fund. 

    For everyone who wants to trade UGAZ stock and DGAZ stock the essential part is understanding the nature of them. 

    First of all, there is no dilemma should you invest in or trade UGAZ stock and DGAZ stock. There is no such thing as investing in UGAZ stock or DGAZ stock. Forget them if you are an investor, they are not for a long haul. The expense ratio is 1.65% so it is more likely that you will have zero chances to be profitable if you try to invest in them. Let’s say this way, according to historical data, over a period of one year they had a negative return of almost 56% and the negativity is increasing as times go by. For three years, for example, you can lose around 90% of your investment. 

    So, to summarize, UGAZ stock and DGAZ stock is for short-term trading.  

    Catch the trends

    Trading UGAZ stock and DGAZ stock can turn into a profitable project since you can efficiently track the supply and demand. So, it isn’t hard to catch the trends and make a fortune. Maybe not quite a fortune but a lot of money for sure.

    Remember one extremely important thing linked to UGAZ stock and DGAZ stock trading: there is an extremely high risk involved. No one will recommend you trade them but still, there are so many traders doing so.

    How to trade UGAZ stock and DGAZ stock?

    Okay, let’s look into the Natural Gas Sector. For that, we have to get into UNG, which is the United States Natural Gas Fund. It is an ETF composed to give investors exposure to natural gas and it is a highly volatile fund to trade. If you don’t have a stomach, forget the profit gained from this trading. Modern portfolio theory says that UNG is a fantastic solution for traders who are 100% sure that natural prices are able to rebound. Anyway, traders have to track the prices of natural gas, weather reports (that will give you a view into supply and demand). Don’t be confused! 

    Cold weather suggests an increased demand for natural gas, hence the rising prices.

    Is UGAZ an ETF?

    There is a lot to misunderstand energy ETFs and ETNs (exchange-traded notes). 

    The main energy ETFs are The United States Natural Gas Fund (UNG) and The United States Oil Fund (USO). And there are leveraged energy ETNs that tracking natural gas prices. These cover the VelocityShares 3X Long Natural Gas ETN (UGAZ) and VelocityShares 3X Invest Natural Gas ETN (DGAZ). 

    Let’s make clear what is an energy ETF. It couples investments in oil, natural gas, and alternative energy. So, it isn’t hard to diversify your energy investment portfolio.

    Supply and demand have a great influence on crude and natural gas prices. Their prices tend to fall when the supply is bigger than demand. When we have more supply than demand in the market, the prices will rise.

    Politics and crises also can affect these prices. Any uncertainty on the political field such as wars, governmental changes or even tensions will send the crude oil price higher. 

    We mentioned the weather. The crude oil and natural gas prices will go higher when temperatures could cause a spike in price. But also, when the over the warm periods, when we have an increasing demand for cooling, the price of natural gas can rise.

    How to trade UGAZ and DGAZ

    Both UGAZ and DGAZ strictly watch UNG stock.

    The principal target of UGAZ is to increase the daily performance of UNG by 300% or 3 times. For example, if UNG price raises 1%, UGAZ will manifest a daily gain of 3%. It is better to trade UGAZ when there is bullish sentiment on UNG.

    The main objective of DGAZ is to produce profits from the losses in the UNG fund. DGAZ increases the losses by 300% inversely. For example, if UNG price drops by 1%, DGAZ will bring you a profit of 3%. Trade DGAZ when there is a bearish sentiment on the UNG fund. 

    It is obvious that UGAZ and DGAZ have 3:1 leverage. Great, because that might boost your profit. But, keep in mind, that profit is in direct proportion with the risk. 

    Trading UGAZ stock and DGAZ stock means to pay attention to the UNG fund. It is the prime ETF that handles UGAZ and DGAZ as leveraged ETFs. That will provide you a view into the direction that this market is going. You have to evaluate should you trade UGAZ or DGAZ because they will give you a profit for opposite moves.

    UNG is really a difficult exchange-traded fund. 

    Firstly, natural gas is a very volatile stock. Further, UNG isn’t directly related to natural gas in the physical sense of it.

    Moreover, it doesn’t pay dividends. It uses future contracts and OTC exchanges to detect the natural gas price. Despite the fact that UNG may not be a good investment, UGAZ and DGAZ may be a good fit. How is that? As we said before, UGAZ stock and DGAZ stock are not suitable for long-term investing. And since you will hold your position for a few days or less, you are not interested in dividends and moreover, if the UNG fund has long-term decline, that will not affect the short-term volatility. 

    How all of this work? 

    ETNs provide tripled leverage for one trading day. Let’s say the natural gas price increases by 3%, UGAZ will grow by 9% and DGAZ inversely will drop by 9%. That’s why trading UGAZ and DGAZ stock is for short-term traders only. If you plan to invest in them for the long-term, your chances to make a profit are zero. 

    Think about UGAZ and DGAZ as up-gas and down-gas. When the natural gas price is going up, it will like UGAZ. Hence, when the price is going down, you will profit from trading DGAZ. Simple!

    Real-life example

    On January 30, DGAZ traded $285.20 which was $18.88 more from the prior trading day. DGAZ stock rose by 6.62%.

    It rose from $267.50 to $285.20 and gained 3 days in a row. Will it succeed to continue gaining or take a break for the next few days? We’ll see. Maybe the best example of how this stock is volatile shows the fact that during the trading day the stock oscillated 8.08%. A day low was at $271.09, a day high was at $293.00. In six of the past 10 days, the price up by almost 44%. But volume fell by almost 20.000 shares and it can be a sign that something is going to change in the next days. Falling volume is always a signal of such occasions.

    The price of natural gas went lower over the past 3 months, above the 5-year average. Increasing sellings are noticed in the futures market. The current data was not bearish, but the market reacted negatively. 

    That is how UGAZ stock and DGAZ stock work.

    Can you short UGAZ stock?

    You can always go short with the leveraged ETF pairs. A popular strategy over the years has been: short both sides of a paired leveraged ETF or ETN, and get the cash. The point is to short the long position on leveraged ETF and short leveraged ETF for the same sum. After that, just watch how volatility can benefit you. 

    For instance, if we examine imaginary the leveraged ETFs associated with natural gas and we see one is down almost 55% over the last 12 months, while the other has fallen 75%. A trader can short both sides for, let’s say $10,000 each, they easily could find themselves up to $12,900 off the $20,000 total short position. That’s a pretty good gain.

    This is true most of the time. But you have to guess the right time frame. Of course, it is always a matter of how fat your account is. Everyone who can stay in the game long enough will be a winner.  But it is a big challenge.

    Shorting both sides isn’t an easy money way. Shorting makes sense only if you do it with a small part of your portfolio and you have a lot of cash. In any other case, it can be extremely dangerous when shorting both sides of a leveraged ETF.

  • Leveraged ETFs – How to Trade, Guide, Tips and Strategies

    Leveraged ETFs – How to Trade, Guide, Tips and Strategies

    (Updated October 2021)

    Leveraged ETFs - How to Trade, Guide, Tips and Strategies
    Two times leveraged ETF is a vehicle calibrated to 200% or double the gain or loss of the price movement

    Did you come across something called a leveraged ETFs?  What is leveraged ETF and how it is different from other ETFs? We found a lot of questions like these thanks to visitors to our website. We’ll try to make this closer to you especially if you are a beginner in this field. 

    Let’s take time to jump in and explore these somewhat new securities.

    Firstly, leveraged ETFs aren’t for long-term investors.

    When you are buying a leveraged ETF, you must know that you have to make short-term trade. As we said, it isn’t a long-term investment. For newbies, a short-term trade lasts from one day to several weeks, not longer. Don’t try to buy a leveraged ETF for a long-term investment. 

    They became one of the most successful varieties of ETFs in recent times. So, we can easily say that leveraged ETFs are a novelty. However, they can be difficult innovation. Well, they are not either good or harmful, all you need is to know them better to be able to trade. Here are some basics about leveraged ETFs.

    Let’s say the traditional ETF tracks one security in its underlying index, 1:1. As a difference, with leveraged ETF, you can strive for a 2:1 or even 3:1 ratio. A leveraged ETFs use financial derivatives to magnify the returns of an underlying index. 

    Leveraged ETFs are possible for the Nasdaq 100 and the Dow Jones Industrial Average, for example.

    Where is the advantage?

    Leveraged ETFs can help you to capitalize on the short-term momentum of a particular ETF. The main question is how to add leveraged ETFs into your portfolio?

    For example, the trader is assured that a particular stock will drop. And trader is shorting that stock. Besides, shorting stocks are bought on margin and the trader has to borrow the money from the broker. That is leverage.

    With leveraged ETF, you don’t need to buy the securities on margin, since it allows you to amplify your returns by multiples of over 1 up to 2 or 3 times. That depends on the ETF product you are trading. The amount of leverage will depend on your experience or temperament. Some less-experienced traders will choose lesser leverage, for example.

    But be aware, they are designed to return three times the inverse of the S&P 500 index. So, if the S&P 500 drops by 1%, this fund should rise by approximately 3%. And contrary, if the index rises by 1%, this fund should drop by about 3%.

    Leveraged ETFs have the aim to outperform the index or stock they track. 

    Also, there are inverse leveraged ETFs. They give multiple positive returns if some index decreases in value. They operate the same as normal inverse ETFs but designed for multiple returns.

    Leveraged ETFs are not suitable for beginner’s portfolio

    Please, don’t make a mistake. Yes, it is fascinating to have amplified returns but you should never add leveraged ETFs into your long-term portfolio. By buying them as a long-term investment you are making a foolish decision. To repeat, leveraged ETFs are not investments, they are speculation. Don’t mislead yourself.

    Moreover, the payoff may not be as bright as you predict. So, they are risky. You will have to pay management fees, brokerage commissions, taxes on capital gains. 

    Leveraged ETF surely has its purpose for short-term investing. For example, you can use it as a hedge to protect a short position. Yet, long-term investors should be careful with leveraged ETFs.

    Definitely, when things are going fabulous, leveraged ETFs are excellent investments. Over the first 6 months in 2017, the S&P 500 has returned a bit over 10% but the 3 times amplified leveraged ETF has returned approximately 30%.

    But, think about what happens when the market turns down. For example, the S&P 500 falls by 10%. A leveraged ETF tracking the index could fall by approximately 30%. Just think about these figures.

    How to make success in trading leveraged ETFs

    As experts recommended, start with small if you aren’t experienced enough. When your portfolio becomes larger add more shares. There will be more risks, of course. But you will diversify your trades. Some elite traders recommend starting with an account of $25.000 minimum. Less isn’t recommended due to trading ability and margin rules for smaller accounts. Moreover, a smaller amount may cause conflicts in your decisions. You’ll need space to make them. 

    Further, trade when the sentiment is low. It is the best opportunity to profit. Set a stop-loss to, let’s say, minus 2% or 2.5%. Follow the trend and enter the winning position. If your profit goes up, sell some of your winning positions. Do it on spikes. If you reach 2% of profit very quickly, sell half of your shares to move stops up to breakeven. This can be a no-lose trade.

    Read a lot about ETFs and leveraged ETFs and test some free trials to find the accurate one. Do your own homework, it is the best way.

    Always monitor leveraged ETFs on a daily basis. If you have to use a limit order on a position it is reasonable to sell your position since you can’t follow market makers strictly. If you want to turn trade, it is better to trade traditional ETFs. that will give you less profit, but more freedom. For leveraged ETFs, you will need to sit and look at the screen or phone almost all day long. Trading isn’t for everyone, at all. That job can be addictive. Take a break from time to time but don’t give up. If you made some mistakes, keep in mind why, when, what caused them. And learn how to avoid them.

    And buy when the ETFs are positive.

    Disagreements

    The leveraged ETFs are new and still developing, and the disagreements will change as time goes by.

    Yes, they will provide you 2 times bigger returns but not always.

    The typical fault is that leveraged returns are on a yearly basis. This is false. They provide multiplied returns on a daily basis. So, don’t look at the index’s yearly return of say 2% because the leveraged ETF will seemingly not have a return of 4% per year. Rather take a look at the daily returns during the year. However, something is more important. The multiple returns don’t mean you will have multiple profits. You may have multiple negative returns also. 

    Leveraged ETFs are high-risk due to their design. Also, some index-tracking malfunctions may occur as well as some other limitations.

    Bottom line

    These the most attractive ETFs in the market today have a great advantage of using. Traders can overcome some of the risks through diversification and leveraged ETFs are very suitable for that. Still, they are still adjusted for stocks only. Therefore if the stock market falls the ETFs will fall too. Anyway, you can enhance your trades if you spread the risk across other assets besides stocks. It’s easy to find ETFs assets like currencies, bonds, or commodities. That will help you to improve your portfolio diversification buying power (the last mentioned is for really aggressive traders).

    Leveraged ETFs are new products but they are providing more choices to manage risks and take profit. 

    They are a good option but what if you don’t want to enhance your buying power if the bear market is in play? That would require short positions to take advantage of the downside potential in the market.  A leveraged ETF could be a great answer in this situation, also.