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Future Technology Leveraged ETFs: Opportunity or Trap?
Artificial Intelligence (AI), robotics, and quantum computing are fields that are gaining attention for their potential for future growth. Leveraged exchange-traded funds (ETFs) that invest in these areas are considered attractive options for expecting high returns in a short period.
However, it is crucial to recognize that leveraged ETFs are high-risk investment products that are readjusted daily, and when held for more than a day, investors must bear considerable risks of substantial losses due to the compounding effect.
This article will analyze the current status of leveraged ETFs in these technology fields as well as the key considerations to be aware of when investing. Investors will be able to make more informed decisions through this information.
What is a Leveraged ETF?
A leveraged ETF is a financial product designed to track the daily returns of a benchmark index or security at 2 or 3 times that amount. This structure primarily utilizes derivatives such as swaps, futures, and options.
It is important to note that these ETFs aim for 'daily' returns. As a result, holding them for the long term can lead to different performance compared to the simple multiple of the underlying index due to compounding effects and reduced price volatility.
In conclusion, these ETFs are suitable for professional investors who prefer short-term trading and should be remembered that they are not suitable for long-term investment.
Current Status of Leveraged ETFs by Sector
Leveraged ETFs exhibit different characteristics across the AI, robotics, and quantum computing sectors.
In the AI sector, various financial products based on multiple indices are being launched. For example, 'Leverage Shares 3x Long Artificial Intelligence ETP (GPT3, AI3)' tracks the Solactive US Artificial Intelligence Index three times, while 'Direxion Daily AI And Big Data Bull 2X Shares (AIBU)' tracks the Solactive US AI & Big Data Index two times.
Such products indicate that the AI industry has already entered a stage of maturity to some extent and demonstrate a diverse ecosystem of various companies. These index-tracking products offer investors various opportunities related to AI and serve as means to respond swiftly to market changes. The importance of these products is expected to grow alongside advancements in the AI field.
In the robotics sector, 'Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares (UBOT)' is gaining attention as an ETF that seeks double performance. This ETF is based on the Indxx Global Robotics and Artificial Intelligence Thematic Index and features investments in various global robotics and AI companies.
Furthermore, UBOT utilizes a fund of funds structure to maximize the diversification effect. Through this, investors can enjoy the benefit of accessing multiple companies with a single investment. Considering the growth potential in the robotics and AI fields, this ETF could be an interesting option.
Currently, the leveraged ETFs related to quantum computing are limited to two times tracking stocks of specific companies such as IonQ and D-Wave, such as 'Defiance Daily Target 2X Long IONQ ETF (IONX)' and 'Tradr 2X Long QBTS Daily ETF (QBTX)'. This situation reflects that the quantum computing industry is still in its early development stage and that there are few companies worth investing in.
Additionally, some ETFs have minimal assets under management, raising concerns about liquidity and sustainability. These issues become factors that compel investors to make cautious decisions. Although the quantum computing market has significant growth potential, it is crucial to realize that reliable investment opportunities are currently limited.
Key Considerations When Investing
When investing in leveraged ETFs, several important factors must be considered.
First, there is a risk of volatility. The greater the volatility of the underlying asset, the greater the possibility of losses.
Second, due to the compounding effect and path dependence, the difference between expected and actual returns can widen over the long term, and losses can occur even in sideways markets.
Third, using derivatives such as swap contracts can introduce counterparty risk.
Fourth, it should be noted that the costs, such as management fees, are relatively higher compared to regular ETFs.
Finally, active monitoring and a clear short-term investment strategy are necessary.
This investment approach is not simply 'set it and forget it,' and it is very important to continuously monitor the strategy through daily performance management.
Investing in Leveraged ETFs: A Cautious Approach is Key
Leveraged ETFs in the fields of AI, robotics, and quantum computing are financial products that can pursue high returns in a short time. However, these products carry significant risks and complexities.
While index-based products exist in the AI and robotics domains, the quantum computing sector is still characterized by speculative investments centered on individual stocks. This makes these ETFs more suitable for short-term and strategic approaches rather than long-term investments.
Investors must fully understand the operating principles, inherent risks, and high costs of these products, and it is important to carefully evaluate their investment preferences and risk tolerance before proceeding.
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