This Is Why I Would Buy SPXL

If you like to drive in the fast lane as an investor, there’s an exchange traded fund (ETF) that you’ll definitely want to check out. It’s called the Direxion Daily S&P 500 Bull 3X Shares ETF (NYSEARCA:SPXL), and while there are risks to consider, this fund could provide potential profits if it’s used cautiously.

There are plenty of growth ETFs out there, but the Direxion Daily S&P 500 Bull 3X Shares ETF is different. Indeed, the SPXL ETF’s share price might grow exponentially, but it could also fall very fast.

At the same time, there’s a safety element to this unusual ETF and it can be deployed judiciously if you follow certain guidelines. So, let’s gear up for a rapid ride with a fast-moving fund, the Direxion Daily S&P 500 Bull 3X Shares ETF.

Triple Leverage on the S&P 500

Probably the most famous U.S. stock market index is the S&P 500, which includes around 500 large-cap stocks. You’ll surely recognize many of the companies features in the S&P 500, such as Apple (NASDAQ:AAPL), Coca-Cola (NYSE:KO), Exxon Mobil (NYSE:XOM), Bank of America (NYSE:BAC), Johnson & Johnson (NYSE:JNJ), and Home Depot (NYSE:HD).

If you just want to get exposure to the S&P 500 in your portfolio, you can simply purchase shares of the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). This is an ETF that does a good job of tracking the price moves of the S&P 500 index.

What makes the Direxion Daily S&P 500 Bull 3X Shares ETF different is that it doesn’t just follow the S&P 500 like the SPY ETF does. Instead, the SPXL ETF provides triple leverage or magnification.

On any given trading day, the Direxion Daily S&P 500 Bull 3X Shares ETF moves three times as fast as the S&P 500. This means you’ll see triple-magnified price moves in both directions, up and down.

There are other details you ought to know about the fund. First, the Direxion Daily S&P 500 Bull 3X Shares ETF has a net expense ratio of 0.87%. In other words, for every $100 invested in the SPXL ETF, $0.87 worth of operating fees per year will be automatically deducted from the share price.

Furthermore, the Direxion Daily S&P 500 Bull 3X Shares ETF offers dividend distributions every three months. Reportedly, SPXL’s forward annual dividend yield is 0.88%.

Addressing the Risks of SPXL

Certainly, there are risks associated with the Direxion Daily S&P 500 Bull 3X Shares ETF. The most obvious risk is that, if the S&P 500 goes down, the SPXL ETF can decline three times as rapidly.

The fund’s prospectus mentions another notable risk. To sum it up, the Direxion Daily S&P 500 Bull 3X Shares ETF is rebalanced daily. Consequently, if the fund is held for more than one day, there’s no assurance that SPXL will accurately provide 300% returns on the price moves of the S&P 500.

Now, let’s look at the five-year chart of the Direxion Daily S&P 500 Bull 3X Shares ETF to see how the fund performed in the past. Impressively, the SPXL ETF roughly tripled in price during the past five years.

It’s possible that the Direxion Daily S&P 500 Bull 3X Shares ETF didn’t always provide exactly 300% of the price moves of the S&P 500. Nevertheless, the fund performed quite well on a multi-year time frame. Plus, the long-term shareholders of SPXL collected dividend distributions along the way.

Here’s Why (and How) I Would Buy SPXL

All in all, I would gladly buy the Direxion Daily S&P 500 Bull 3X Shares ETF but only when following certain safety guidelines. The main principle is to only buy a small number of SPXL shares in order to reduce the risk.

Another safety guideline is to buy more SPY ETF shares than SPXL shares. That way, you’ll have broad portfolio diversification with less overall leverage risk because SPY is un-leveraged.

Since the S&P 500 is diversified and tends to perform well over the long run, there’s a safety element to the Direxion Daily S&P 500 Bull 3X Shares ETF. With the SPXL ETF, you’ll be invested in many well-known businesses across multiple sectors of the economy.

I also like the Direxion Daily S&P 500 Bull 3X Shares ETF because it pays quarterly dividends. Moreover, the fund’s annual operating fees aren’t extremely low but also aren’t outrageously high.

Since I expect the S&P 500 to move higher over the long term, I would buy a few shares of the Direxion Daily S&P 500 Bull 3X Shares ETF and then purchase a larger position in the SPY ETF. It’s a strategy with some risks but also broad-market diversification, decent dividends, and just enough leverage to satisfy my need for speed.