Equity Index Exchange Traded Funds (ETFs)

As an investor, you have two to three choices as it pertains to the amount of leverage that you want to assume if and when the exponential moving average triggers a buy signal (See the following Bullish Investment Strategy). For example, in the following table, SPY (+1x) means that you are purchasing an ETF on the S&P 500 that replicates the move in the underlying security (one for one). In other words, if the S&P 500 increases by 5%, SPY would replicate the 5% move. If you want more leverage, say 300% or 3x, you would purchase the UPRO (+3x). Now, if the S&P 500 increases by 5%, the UPRO would increase by 15%, or 3x the increase in the S&P 500.

Bullish Investment Strategy: When the 15-week EMA exceeds the 40-EMA on the S&P 500 (weekly close), which would trigger a bullish signal, you have to decide on the amount of leverage (risk) that you want to assume. Let’s assume that you have $300 dollar portfolio. In addition, you do not want to assume risk greater than that associated with the S&P 500. Given that scenario, you have three strategies that you could implement: (1) purchase $300 worth of SPY, which would replicate the price movement of the S&P 500, one for one, (2) purchase $150 worth of SSO, which would replicate 2x the movement in the S&P 500 and invest the remaining $150 in a money market instrument, such as BIL that replicates the return on 1-3 month Treasury bills (Your overall risk would be approximately the same as in strategy 1, but you are earning interest on the $150 invested in a money market instrument.), (3) purchase $100 worth of UPRO, which would replicate 3x the movement in the S&P 500 and invest the remaining $200 in a money market instrument, such as BIL (Your overall investment risk would be the same as in strategy 1 as delineated under strategy 2.).
Note: To enlarge the table, double-click inside of it.