Investing in the S&P 500 index can be a simple way for most long-term investors to build wealth. The average return for the S&P is about 10% per year, which includes up years and down years. If you’ve got enough time, that can make you a millionaire.
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But if you want to achieve millionaire status faster, one possible strategy is to use a leveraged exchange-traded fund (ETF) like the ProShares Ultra S&P 500 (NYSEMKT: SSO). This leveraged ETF gives you a chance to earn double the daily performance of the S&P 500.
However, leverage is not a free lunch. These types of ETFs go up faster when prices of constituent stocks rise, but they also decline faster when share prices go down.
There are no guarantees in investing, but let’s look at how investing in the ProShares Ultra S&P500 ETF could make you a millionaire (while understanding its risks).
The ProShares Ultra S&P 500 has been available to investors for almost 20 years. Since its inception in June 2006, the ETF has delivered average annual returns (by net asset value) of 14.5%. That’s significantly more than the S&P 500’s long-term average of 10% per year.
There’s no guarantee that this or any other ETF can continue to deliver the same average annual returns forever. But for this exercise, let’s assume you invest $10,000 in it and it keeps delivering 14.5% per year, on average, for the next few decades. After 10 years, your initial $10,000 investment would grow to $38,730. After 25 years, you would have $295,214. And after 35 years, it would be over $1 million.
Here’s one big problem with the ProShares Ultra S&P 500 ETF for most investors: It requires you to take risks by using leverage. That means the ETF borrows money to buy stocks. Leverage can help you become a millionaire faster, but it can also make your investments decline faster.
The S&P 500 index is down about 3.8% year to date, while the ProShares Ultra ETF has declined by about 9%. It’s easy to get excited about using leverage to supercharge your gains, but can you really stomach the possible losses?
This ETF delivers twice the daily return of the S&P 500. When that return is positive, you might feel great. But when the return is negative, your account balance drops twice as fast compared to a regular S&P 500 index fund. Not every investor is emotionally prepared to ride those inevitable downturns. For the first five years since SSO was launched in 2006-2011, the fund declined by more than 40%.
