What Is a 3x Bull ETF? Benefits, Risks and Examples

A 3x bull ETF is a specific kind of exchange-traded fund that aims to offer returns that are three times the performance of the index it tracks. Let us learn more about them below. 

What Is a 3x Bull ETF?

ETFs, or exchange-traded funds, are baskets of securities like stocks that track underlying indexes. To take an example, a Nifty 50 ETF comprises stocks from 50 companies that are listed on the Nifty index. The ETF performance will replicate the performance of the Nifty index. ETF stocks are also listed on the exchange in the manner of individual stocks. They can be traded throughout each business day. 

In this context, a 3x bull ETF will offer three times the performance of the index it is tracking. Hence, the index gains a point. In this scenario, a 3x ETF will also earn 3 points. Yet, while these ETFs aim to generate 300% profits, there may be potential for losses at times. If the index loses a point, then it will be a 3x loss for the ETF holder.

Traders usually trade with 3x bull ETFs. This is because they count on the market growth to scale up their profits. You should also note that these ETFs have higher expense ratios than regular ETFs. 

How Does a 3x Bull ETF Work?

These ETFs usually invest in futures contracts, forward contracts, options, reverse repurchase agreements, swap agreements, equity caps, and other instruments. Suppose you invest ₹100 in a 3x ETF. If the index price increases by 5% one day and dips by 5% on the next trading day, it directly impacts the ETF returns. So, the fund will increase by 15% on the first day and plunge by 15% on the next day. 

At the end of the first day, the initial investment will be worth ₹115. It will be valued at ₹97.75 at the end of the second trading day, indicating a 2.25% loss on the investment. The compounding loss feature sometimes makes traders buy and sell these assets with a short-term perspective. These ETFs are usually held for a day or up to a week to lower the risks of compounding losses (which may lead to the loss of the entire principal investment). 

Who Should Consider Investing in 3x Bull ETFs?

A 3x bull ETF is suitable for the following investors: 

• Someone who is knowledgeable about the market and understands how it works.
• Investors who can devote ample energy and time to actively manage investments. 
• Those who can absorb losses and understand the risks. 
• People who have deep knowledge of short-term trading. 

Hence, these ETFs are ideal if you have vast market knowledge and have expendable funds. You should have the strength and financial ability to take any potential loss. 

Benefits of 3x Bull ETFs

Some benefits of 3x bull ETFs include: 

• Higher returns

  In case the market moves upward and you are confident about the trend, these ETFs may ensure high and swift returns. These may outstrip the returns generated by conventional ETFs. 

• Intraday trading benefits

  These are popular choices for intraday trading. You can use them to capitalise on short-term market momentum without directly using margin accounts.

• Zero margin requirements

  You do not need a margin account for trading leveraged ETFs, unlike futures and options trading. It makes the process simpler for investors in the retail category. 

• Diversification advantages

  While leverage does come into play, they represent a basket of various securities. This diversification considerably lowers risks as compared to holding just one stock.

• Multi-market access

  You will come across lists of 3x leveraged ETFs that cover multiple sectors, indices, global markets, and commodities. It enables diversification throughout various high-performing ETF segments. 

• Higher liquidity

  A majority of leveraged ETFs actively trade on exchanges, which in turn ensures higher liquidity. Hence, you can easily buy and sell them with negligible slippage. 

Risk Associated With 3x Bull ETFs

3x bull ETFs come with several risks, too. Some of them include: 

• Amplified Losses

  While these ETFs may triple the gains, the same holds for potential losses. Hence, a 5% decline in the index may result in a 15% loss for you. It may eat up your capital swiftly in case the market moves in the opposite direction. 

• Daily Reset

  These funds reset daily, and holding them for extended periods may lead to higher risks. This may lead to performance that does not sync with the anticipated return (on account of compounding). 

• High Expense Ratios

  3x leveraged ETFs may come with higher expense ratios. You will have to pay more in fees due to the complex nature of these financial instruments. They may erode your overall returns over time. 

• Market Timing Risks

  To successfully invest in these ETFs, you have to be precise in terms of your timing and trend forecasts. Incorrect moves may cost you otherwise. 

• Tracking Errors

  At times, ETFs do not accurately match the desired 3x performance. This may happen due to factors like costs, volatility, and the mispricing of derivatives. 

Examples of 3x Bull ETFs (International)

Several 3x bull ETFs are well-known globally. Some of them include the following: 

• Direxion Daily Semiconductor Bull 3x Shares
• Direxion Daily Semiconductor Bull 3x Shares
• ProShares UltraPro S&P 500
• Direxion Daily Technology Bull 3X Shares
• Direxion Daily Financial Bull 3X Shares
• MicroSectors FANG+ 3 Leveraged ETNs
• MicroSectors Oil & Gas Exp. & Prod. 3x Leveraged ETN
• Direxion Daily Pharmaceutical & Medical Bull 3X Shares
• MicroSectors Energy 3X Leveraged ETNs

How 3x Bull ETFs Compare to Other ETFs

These ETFs have higher expense ratios than regular ETFs. Hence, a major chunk of the returns will be paid out as fees to fund managers. This is the major difference between 3x bull ETFs and other types of ETFs. So, they are leveraged ETFs with the potential for three times the index performance (both profits and losses). 

Inverse ETFs are those that offer gains when the performance of the indexes that they track declines. At the same time, there are other types like equity, commodity, sector, currency, and fixed income ETFs. None of them is leveraged in this manner, so that is another key difference. 

3x Bull ETF vs 3x Bear ETF

A 3x bull ETF seeks to offer three times the performance of the index it tracks. They seek returns of 300% on their benchmark index for one day. 3x bear ETFs are just the opposite, seeking returns of -300% of the benchmark index return for a single day. 

Should You Invest in a 3x Bull ETF

Is investing in a 3x bull ETF worthwhile? You should ideally venture into these investments if you are an experienced trader. An understanding of chart patterns, technical indicators, and short-term price actions is a must in this regard. At the same time, short-term and intraday traders who actively track the market may benefit from these investments. Yet, the need of the hour is taking swift action based on movements in prices. 

These ETFs are also suitable for hedge fund managers. They may use leveraged ETFs as part of their broader strategy to optimise outcomes from their portfolios. HNIs (high net-worth individuals) with surplus funds (and the ability to absorb losses) may use them to make the most of short-term bullish trends. You should only invest if you understand the product deeply, including the fact that it resets daily.

Limit your exposure (ideally 5-10%) to leveraged ETFs while using stop-loss orders to safeguard your portfolio for significant drawdowns. Active tracking and quick decision-making are a must to succeed. So, only go ahead with high-volume and liquid ETFs if you can regularly devote this time and energy.