Let me tell you a tale of two investors.

Their names are Jamie and Sarah.

Jamie started investing at the age of 25. He is very conservative and is afraid to lose money in the markets. He can’t afford to see his investments go into the negative territory.

Every month, he invests RM500 in low risk funds such as ASB/ASM, Fixed deposits, and EPF. His average return is 5% per year.

This is how much he will have at the age of 55:

Meanwhile, Sarah only started investing when she was 30, a full five years after Jamie’s head start.

Like Jamie, she commits RM500 per month to her investments, but unlike him, she’s willing to explore higher risk assets to maximize her returns.

Her average return is slightly higher than Jamie’s, at 8% per year.

This is how much she’ll have when she’s 55:

So what’s the lesson here?

Though starting early gives you a significant advantage, returns also play a major role in compounding your investments.

Had Jamie adopted Sarah’s aggressive investing strategy (8% pa returns), he would have RM751,520.85 by the age of 55.

That’s almost 80% more compared to him investing with lower returns, and 57% more than Sarah’s final sum of RM479,057.77.

Of course, an asset with higher risk doesn’t always mean higher returns.

This is because there are no guarantees.

But if you have a 20-30 year time horizon, you can afford to weather the volatility and big swings in the market with the potential of generating more profit.

The table below shows the risk spectrum of various assets and their respective returns:

I won’t be going through each option in this newsletter, as I have already written something similar in the past. You may read it here:

What I really want to focus on are the assets with the highest risk (>8% pa returns).

This includes Crypto, Aggressive Mutual Funds, Margin Trading, and most notably, Using Leverage.

Put simply, leverage is an investment strategy of using borrowed money to maximize returns.

It is a double edged sword that should be prudently used by experienced investors only. ⚠️

ASB Financing

The most common form of leverage is ASB Financing, in which the investor takes a loan from a bank to invest in ASB.

Since a lump sum investment always beats dollar cost averaging (especially for assets that never deliver negative returns), ASB Financing was a no-brainer for Bumiputeras to turbocharge their returns.

This was the case at least until ASB returns started to gradually decline close to the financing rate.

Leveraged and Unleveraged ETFs

In the past decade, the S&P500 grew at an average compounded rate of 8-12% per year.

Many Exchange Traded Funds (ETFs) were created to track the performance of the US index. These include:

1. Invesco QQQ Trust (QQQ)
   Invests in 100 of the largest non-financial companies on the Nasdaq.

2. Vanguard Total Stock Market (VTI)
   Invests in approximately 100% of the US stock market (large, mid, and small caps).

3. Vanguard S&P 500 (VOO)

   Invests in stocks from the S&P, representing 500 of the largest U.S. companies.

As the names suggest, these ETFs are unleveraged and only track the S&P500, so their returns will be close (if not similar) to the US stock market index.

A Leveraged ETF (LETF), on the other hand, uses financial derivatives and debt to amplify the daily returns of the underlying index it tracks.

Most LETFs will aim for 2-3x the performance of an index.

Take the TECL for instance.

The Direxion Daily Technology Bull 3X Shares (TECL) seeks daily investment results of 300% of the performance of the US Select Technology Sector Index.

Since the tech index has gained about 20%, the TECL is up a whopping 60% (or 3x) from January.

But first, a word of caution is in order.

LETFs are very high risk instruments. They are typically only meant for short-term trading. Before investing, ensure that you’ve read the prospectus and understand the mechanics of these instruments.

Leveraged ETFs are great when the market works in your favor, but when things turn south, there’s a possibility for you to lose your entire capital. ⚠️

Here’s an example:

For a 3x LETF, the fund will seek to magnify the daily performance of an underlying index by 300% (or 3x).

If the index rose by 1% in a single day, the LETF would return +3%.

However, if the index ever declines by more than 33% in a single day, the 3x ETF will lose all value and go to zero.

The 2020 Covid market crash serves as a warning to investors who are interested in using leverage.

LETFs reset their gains and losses everyday.

The fund does not amplify the monthly or annual returns on an index, but instead tracks the daily ups and downs, resetting each day.

This means that LETFs can’t compound its returns or build on itself, which is why they should not be used for long-term strategies.

Example:

You invest RM5,000 in a 3x S&P500 ETF (a leveraged ETF that seeks 3x daily returns of the US market).

The next day, the S&P rose by 2%.

In this case, the 3x ETF will go up by 6% (3x) in value.

Your initial investment will be worth RM5,300 instead of RM5,100.

However, on the following day, the index goes down by 2%.

The 3x ETF loses 6% in value.

Your initial investment will be worth RM4,982, a loss of 0.36%.

This is 9 times more versus an investment that would normally track the index without using leverage (0.04% loss).

Due to the daily resets, the value of LETFs will tend to decay overtime, even when the price movements are favorable.

If the market moves sideways or even downwards, this is where you could really lose a large chunk of your capital.

Conclusion

While leveraged ETFs provide an avenue for you to potentially maximize your returns, they are highly risky and must be seriously studied before you dabble in them.

As always, never put all of your eggs in one basket. ⚠️

How and where can I invest?

You can invest in ETFs and LETFs just like how you invest in a regular stock.

As long as your broker supports US shares, you may search for their tickers (QQQ, VTI, TECL, etc.) and buy/sell them during the trading hours of the US market (9.30 pm to 4.00 am MYT).

Notable Leveraged ETFs:

Don’t have a share account yet?

Register with Rakuten using my referral link today and receive 1,000 RT points (worth RM10) to lower your brokerage fees.

That’s all for this week’s newsletter!

Disclaimer: The information shared in this newsletter is for educational purposes only. Investing in any of the products stated above has their respective risks. You should be fully aware of the dangers involved before placing your money in any instrument.

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