~ by Snehasish Chaudhuri, MBA (Finance).
ProShares Ultra S&P500 ETF (NYSEARCA:SSO) is an exchange-traded fund that invests through derivatives (such as future, swap) in stocks of companies operating across diversified sectors. This leveraged ETF is designed to offer 2x return on a daily basis as compared to its underlying benchmark, which is composed of growth and value stocks of large-cap companies. The fund is targeted to strategic investors looking to gain from short-term price movements. SSO provided robust total returns during 2023 and strong double-digit returns over a longer time period. Historically, SSO has been consistent in its quarterly payouts.
SSO Tracks 2x the Daily Performance of S&P 500, Returns May Differ Over Long Run
ProShares Ultra S&P500 ETF was launched in June 2006 by ProShare Advisors LLC. It seeks to track 2x the daily performance of the S&P 500 Index (SP500), by using full replication techniques. This is a float-adjusted, market-cap weighted index of 500 large-cap U.S. based companies selected through a process that factors in criteria such as liquidity, price, volatility, market-cap, financial viability, public float, etc. However, SP500 cannot be traded directly, and SPX and SPY that represent options on the S&P 500 index are traded in the market. Due to the compounding of daily returns, holding periods of greater than a day result in returns that are significantly different, and SSO’s returns over the long run may differ in value and direction from the index return for the same period.
ProShares Ultra S&P500 invests in financial instruments that advisors believe, in combination, should produce 2x daily returns consistent with its investment objective. Although one never gets a 2x return because there is always a cost to leverage, still daily returns look decent in a bull market. However, the current market situation is quite tricky. It is moving fast and stringing together days of gains only to often see those gains evaporate fast. Under such circumstances, I think investing in leveraged equity funds like SSO should be made cautiously.
SSO Has Been Generating Strong Returns Over The Years, Which Makes it Attractive
ProShares Ultra S&P500 ETF does not pay any dividend at present and over the past five quarters it has paid a dividend only once. However, prior to 2022, the fund paid consistent payout. It has a high expense ratio of 0.89 percent, primarily due to its leverage component. The fund seems to be quite lucrative due to its total return over the years. SSO is one of those rare leveraged ETF that generated almost 39 percent total returns during 2023 and 21.2 percent average returns over the past three years. Over the past 10 years, SSO generated strong double digit annual returns of 19.8 percent. Moreover, an investor needs to risk very little in funds, as he/she is not required to own stocks in the underlying ETF. That way, such returns are more than welcomed.
Tech-focused Stocks Should Impact The Performance Of S&P 500 Index And SSO
Almost 71 percent of its exposure is in derivatives from five sectors – financial, industrial, healthcare and information & communication technology (ICT). I strongly believe that these four sectors are having the maximum growth potential in the coming decade. Most prominent exposures in the S&P 500 index are the giant-cap technology-oriented stocks like Apple Inc. (AAPL), Microsoft Corporation (MSFT), Amazon.com, Inc. (AMZN), NVIDIA Corp (NVDA) Alphabet Inc. Class A (GOOGL), Alphabet Inc. Class C (GOOG), Tesla Inc (TSLA), Meta Platforms Inc (META), Broadcom Inc (AVGO), Adobe Inc (ADBE), Mastercard Incorporated (MA) and Visa, Inc. (V). Together, these 12 stocks account for more than 30 percent of the index. So, it is inevitable that this fund will be highly impacted by the performance of the technology sector.
Beta Slippage Is A Concern For 2x Leveraged Funds, But SSO Has A Negligible Drift
Despite SSO generating a strong double-digit growth over the years, beta slippage may remain a concern due to its 2x leverage. SSO is benchmarked on S&P 500 index, which is traded in the form of SPY and SPX. Due to its 2x leverage, the percentage change in the value of SSO will be certainly higher than the percentage change in SPY or SPX or any unleveraged fund with a similar portfolio. Now, if SPY or SPX goes up by 25 percent one day and then falls by down 20 percent the other day, the value will remain the same as before. So, an unleveraged fund or index will have the same value as before.
On the other hand, a 2x leveraged ETF like SSO that goes up by 50 percent the first day and then falls by 40 percent results in only 90 percent of its original fund in terms of value. This is known as beta-slippage. During the past one year, SPY with a similar portfolio generated a price return of 11.79 percent. During the same period SSO’s return was 11.75 percent. We can observe that this 2X leveraged ETF has mimicked the index and thus had a negligible drift of -0.5 percent. I believe investors don’t need to worry much in this aspect, but become fully aware of the risks of leveraged funds as explained here before trading them.
Investment Thesis
ProShares Ultra S&P500 ETF is a leveraged ETF that is designed to offer a 2x return on a daily basis as compared to the S&P 500. The fund provided robust total returns during 2023 and strong double-digit returns over a longer time period. Historically, SSO was consistent in its quarterly payouts, although not offering any payout at present. The fund is little overweight in tech-focused stock, a sector which is expected to do well over the next decade. This 2X leveraged ETF has also mimicked the S&P 500 and thus had a negligible drift.
Buying the S&P 500 when valuations look reasonable seems to be a good strategy. After the twin shock of covid-19 pandemic and Russia’s invasion of Ukraine during 2020 to 2022, the overall stock market is observing a bullish trend since the start of 2023. This renewed sense of bullishness makes this fund attractive. So, I recommend staying invested in ProShares Ultra S&P500 ETF, but in a way that manages its downside risk. However, the time is not right for buying more units of ProShares Ultra S&P500 ETF as the fund is trading at a slight premium to its NAV.
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