In the world of investing, some products allow traders to magnify their potential profits. One of these products is called a “3x long.” It sounds technical, but it can be explained in a clear and simple way.
This article breaks down what a 3x long is, how it
works, and which companies offer this kind of product. It also explains risks
and includes a practical example to help make the idea more understandable.
1. What Does “3x Long” Mean?
A 3x long is a type of leveraged financial
product that aims to triple the daily return of a specific index, stock, or
asset. If the underlying index goes up by 1% in a single day, a 3x long product
is designed to go up by 3% on that same day. These products are often found as
Exchange-Traded Funds (ETFs) or Exchange-Traded Products (ETPs).
The word “long” means the
investor believes the price of the asset will go up. The “3x” stands for triple
leverage, meaning the investment moves three times as much as the original
asset, but in the same direction.
For example, if a stock index increases by 2% today, a 3x long ETF tracking that index would try to increase by 6% (3 x 2%). However, if the index goes down by 2%, the ETF would lose 6%.
2. How Does a 3x Long Product Work?
A 3x long product uses financial
tools such as derivatives, futures, and swaps to achieve its target return.
These tools help the fund amplify the returns of the underlying index or asset
without directly owning three times the amount of the asset.
This type of investment is
usually reset daily. That means the fund rebalances its portfolio at the end of
each trading day to maintain the 3x exposure. Because of this daily resetting,
the long-term performance of a 3x long ETF might be very different from three
times the long-term performance of the index.
Let’s imagine a market index
gains 1% every day for five days. A 3x long ETF would aim to rise 3% each day.
However, if the index goes up and down during those five days, the result for
the 3x long ETF could be worse than expected due to something called
“compounding risk.”
3. Who Offers 3x Long Investment Products?
Several companies provide 3x long
ETFs or ETPs. These are regulated financial firms that specialize in leveraged
and inverse products. Some of the most well-known issuers include:
- GraniteShares: Offers products such as 3x Long Tesla, 3x
Long Nvidia, or 3x Long Meta.
- ProShares: Known for a variety of leveraged ETFs based on U.S. indexes like
the Nasdaq-100 or S&P 500.
- Direxion: Provides 3x long ETFs targeting sectors such as technology,
energy, and financials.
- Leverage Shares: Based in the UK, this company also offers 3x
long products on major U.S. and European stocks.
These products are traded on
stock exchanges like regular shares. Investors can buy and sell them during
market hours using brokerage accounts.
4. Examples to Understand It Better
A. First Example:
To make things clearer, here’s a
simplified example using a fictional investor named Peter.
Peter believes that the stock of
Company A is going to rise soon. Instead of buying £1,000 of Company A stock,
he buys £1,000 worth of a 3x Long ETF that tracks Company A.
- On Day 1, Company A goes up by 4%. The 3x Long
ETF aims to go up by 12% (3 x 4%). Peter's investment grows to £1,120.
- On Day 2, Company A goes down by 2%. The 3x
ETF drops by 6%. Now Peter’s investment is worth approximately £1,052.80.
This shows how quickly gains or
losses can grow with a 3x long investment. If Company A had gone down by 4% on
Day 1 instead, Peter would have lost 12% in one day.
B. Second Example:
If Peter buys $100 worth of a 3x Long
Tesla product and the price of Tesla goes up by 5% in
one day, the 3x long product is designed to increase by 3 times that
movement, or:
5% × 3 = 15% gain
So, Peter's earnings would be:
$100 × 15% = $15 profit
At the end of the day, his investment would
be worth:
$100 + $15 = $115
✅
If Tesla goes up 5%, Peter earns $15 with a
3x long.
⚠️ But if Tesla goes down 5%, the 3x long would drop 15%, and Peter would lose $15, ending with $85.
While 3x long investments can
offer strong returns in the short term, they also carry high risk. They are not
typically designed for long-term holding due to volatility decay.
5. Risks and Things to Keep in Mind
A 3x long ETF or ETP is not
suitable for every investor. It is mainly used by traders who want to take
short-term positions and have a clear understanding of how leverage works.
Key risks include:
- Daily Resetting: The 3x performance is only targeted for a
single trading day. Over several days, the results can diverge
significantly from expectations.
- Volatility Decay: In a choppy market, even if the index ends
up at the same level, the 3x long ETF may lose value.
- Magnified Losses: Losses are multiplied, just like gains. A 3x
move against the investor can lead to large financial loss quickly.
- Higher Costs: Leveraged ETFs may charge higher fees compared to regular ETFs.
Due to these risks, it’s
important to monitor these investments closely and use them only when there is
a strong reason to expect short-term market movement in a specific direction.
Conclusion
A 3x long investment product
allows traders to potentially triple their gains in a rising market over a
single day. While it can produce high returns quickly, it also increases the
risk of fast and steep losses. These products are best used by people who
understand leverage and can track their investments closely. Companies like
GraniteShares, Direxion, ProShares, and Leverage Shares provide access to these
tools for active market participants.
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