How to Leverage Your Trading Dollars with Ultra ETFs (Part 1)

Would you like to trade an exchange traded fund (ETF) that can help you double up on your profits? Since I'm sure your answer is absolutely! you'll want to look into ProShares Ultra ETFs. (An ETF is a basket of stocks that focuses on a theme such as market cap, sector, country, and trades as a single stock.)

Although the ProShares family of funds may be best known for their hedging vehicles, the ProShares Short and UltraShort ETFs (when you buy these funds, you are short the market), they also offer the ProShares Ultras. The Ultras are leveraged ETFs that track their underlying index but at the same time offer you more bang for your trading buck.

In this article, I'll discuss the Ultra ETFs and show you two strategies I use to trade with these powerful tools.

About the ULTRA ETFs

Ultra ETFs benefit the trader by moving up (or down) two-percent for every one-percent the underlying index moves up (or down). That means if you're trading the ProShares Ultra Dow30 (symbol DDM), for every one-percent the Dow Jones Industrial index rises, the ProShares Ultra Dow30 (DDM) rises two-percent.

Of course every rose has its thorns. If you're on the wrong side of that trade, and the Dow crumbles, for every one-percent the Dow dives lower the DDM falls two-percent.

Currently, you can choose from 23 Ultras contained in three categories: Ultra Market Cap, Ultra Style and Ultra Sector.

Ultra Market Cap funds

The 6 Ultra Market Cap funds include the Ultra QQQ (QLD | Quote | Chart | News | PowerRating), which tracks the NASDAQ 100 index. Also included is the Ultra Dow 30 (DDM | Quote | Chart | News | PowerRating) (mentioned above), as well as the Ultra S&P500 (SSO | Quote | Chart | News | PowerRating), the Ultra MidCap400 (MVV | Quote | Chart | News | PowerRating), Ultra SmalCap600 (SAA | Quote | Chart | News | PowerRating) and the Ultra Russell2000 (UWM | Quote | Chart | News | PowerRating).

Ultra Style ETFs

The Ultra Style ETFs represent a selection of Russell indexes divided into six funds that target growth and value. At the moment, these funds trade on low average daily volume, making them dubious candidates for short-term trades. The most liquid of these style ETFs is the Ultra Russell2000 Growth (UKK | Quote | Chart | News | PowerRating), which now trades only about 20,000 shares average daily volume.

A note about volume- I usually don't trade stocks or ETFs with ADV of less than 300,000 shares. I know ETF sponsors say you can trade low-volume ETFs easily, but when I see a 5-cent to 20-cent spread between bid and ask prices- I go elsewhere.

Ultra Sector ETFs

The third Ultra category, Ultra Sector ETFs, offers 11 funds that paint a broad brush stroke of U.S. sectors. Your choices range from Ultra Financials (UYG | Quote | Chart | News | PowerRating) to Ultra Oil & Gas (DIG | Quote | Chart | News | PowerRating) and from Ultra Health Care (RXL | Quote | Chart | News | PowerRating) to Ultra Technology (ROM | Quote | Chart | News | PowerRating), and more. At the moment, many of the ETFs in this category also trade below 300,000 shares per day. They are, however, gaining traders' attention and their ADVs are building.

The Ultra Sector ETF trading the most impressive ADV is the Ultra Financials, totaling more than 17-million shares per day. Compare that to volume traded in mid-February (when these shares traded at around 3-million shares per day). Of course, with the extreme volatility playing out in the financial stocks right now, the added attraction to these shares makes sense.

If you study the ProShares Ultra ETFs, you'll probably come up with a selection of different approaches that take advantage of the Ultras' power to leverage your trading dollars.

Three of my favorite strategies

1) Trade Ultra MarketCap ETFs in the short (intraday) and long-term (position) for pure profits.

2) Use Ultra MarketCap ETFs as stock substitutes for laggards.

3) Use these same shares for intraday or overnight trades during times of high volatility (which we are currently experiencing!).

Pure Profit Play

First, I use Ultra Market Cap ETFs for boosting my gains with pure profit plays. For example, if the NASDAQ 100 is soaring higher in an intraday or daily uptrend, a dandy wallet-fattening tactic can be to buy shares of the Ultra QQQ (QLD) as a portion of trading funds you would normally dedicate to the traditional NASDAQ 100 tracking stock, the PowerShares QQQ (QQQQ | Quote | Chart | News | PowerRating). Of course, I'm assuming you're entering with an appropriate long set-up and establish protective stops soon after you enter.

Below is a chart of the QLD market with arrows that show a possible entry on the close of April 3 at 84.65 per share (A nice 20/50-day MA crossover confirms the entry), and an exit at the close of July 19, at 105.46, per share. If you bought 200 shares when you entered, and sold those same shares at the July 19 close, your profits would have totaled $4,162, minus commissions.

RealTick graphics used with permission of Townsend Analytics, Ltd. 1986-2008 Townsend Analytics, Ltd.

To make a comparison, imagine that within the identical time frame, you bought 400 shares of the QQQ (not shown), the traditional NASDAQ 100 tracking stock. Since the QLD costs approximately twice as much as the Q's, I doubled the share size of the Q's to keep the evaluation relatively close on a dollar basis. You'd exit with a profit of $2,268, minus commission, which is a little more than half of the QLD gains.

While I know that most of us don't enter and exit trades with perfect entries and exits such as the one shown, the example does make the case for adding a few shares of the Ultra QQQs to your trading portfolio when the NASDAQ 100 soars in a strong uptrend.

Of course, you'll also want to consider the Ultra Dow 30 (DDM | Quote | Chart | News | PowerRating) when the Dow Jones Industrial Average cavorts higher, and the Ultra S&P500, and the Ultra Russell2000 when those indexes look poised to fly.

Next week Toni Turner will show you how you can use Ultra ETFs to make short-term power plays and also to substitute under performing stocks.

Toni Turner is a trader and investor with seventeen years of experience in the financial markets. She is the best-selling author of A Beginner's Guide to Day Trading Online 2nd Edition, A Beginner's Guide to Short Term Trading and Short-Term Trading in the New Stock Market. Toni has appeared on NBC, MSNBC, CNN, and CNBC. She has been interviewed on dozens of radio programs and featured in periodicals such as Fortune magazine, Stocks and Commodities, SFO, MarketWatch, Fidelity Active Trader, and Bloomberg Personal Finance.

Toni is the President of TrendStar Group, Inc. For more information about her live and online seminars, as well as additional educational products, please go to www.ToniTurner.com