Dividends and Traders chase sky-high returns in leveraged exchange-traded products

On the stock market, most days there is limited speculation but on some days it is easy to find. Most people investing in the stock market are not doing it to speculate, because when you speculate some days you win and some days you lose money. Therefore the challenge is to limit market risk. If you want very limited speculation, you should restrict your investments to stocks similar to dividend producing stocks. However in every market there is opportunity to speculate.

In an article be Saquib Iqbal Ahmed of Reuters, it is possible to buy very leveraged and inverse exchange traded products (ETPs) which magnify the moves of an underlying index or stock several times. It should be noted, these products only account for 1% of the $5.9 trillion universe of exchange traded products.

We all look for funds that have done very well, we compare them to our funds and think maybe I should put some money into those funds. We all tend to forget the past performance does not guarantee the future performance, but we are people and when you read about a fund that is up over 1,000% in the last 11 months, tongues wag. It should be noted throughout the history of the stock market whenever a sector does well, money flows into the sector. The PHLX Semiconductor Index is the bases for the Direxion Daily SemiConductor Bull 3X Shares which seeks to amplify daily moves in the chip index threefold.

Other funds which seek to do the same with other indexes include the ProShares Ultra VIX Short Term Futures ETF, the ProShares Ultra Pro QQQ, not surprisingly millions of dollars have flooded into theses funds. Whether the risk is understood, it is a debatable question, but the desire to have the return is evident, for sometimes the losses can be quick and staggering or large.

Experts or people who spend their days in front of a screen trading, say the ETPs are designed to be short term trading vehicles and not to hold them long term.

Linking to dividend paying stocks, there will be and always is speculation in the stock market, sometimes people win and sometimes people lose. If you are willing to take the risk, then go ahead, however over the long term investing in profitable companies which pay a dividend is very rewarding with limited risk. If you make 50% this year and lose 45% next year or you can make about 10% total return over the 2 years which is better? The answer is Option B because over 2 years the return is 5% and 10%. If you did do Option A, it would be quite a ride, but Option B increases your wealth over the long term.

There are more questions than answers, till the next time – to raising questions.

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