There is a new way to trade biotech out there now. For active traders and investors looking for juiced up returns in the hot biotech sector, ProShares has launched two triple leverage exchange traded funds (ETFs) in biotech.

ProShares has launched the UltraPro Nasdaq Biotechnology ETF (NASDAQ: UBIO). This ETF seeks to provide three times the daily performance of the Nasdaq Biotechnology Index, before fees and expenses.

UltraPro Short Nasdaq Biotechnology ETF (NASDAQ: ZBIO) has a goal of offering investors -3 times, or triple the inverse, of the daily performance of the Nasdaq Biotechnology Index, before fees and expenses.

ProShares now offers investors four leveraged exposure ETFs to the Nasdaq Biotechnology Index. The group specifies that these offerings are geared toward knowledgeable investors. The long and short of the matter is that these are for intraday moves only, as they can experience a wide degree of what is referred to as “tracking error,” meaning ETFs not unilaterally tracking the movement of the underlying index on which they are supposed to be based.

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The biggest warning here is that holding leveraged ETFs over time will tend to erode performance because of the fee structures, the cost of borrowing and the overnight gaps that lead to further tracking error not unilaterally recognized in leveraged ETFs.

As with all investment vehicles, it is extremely important for investors to understand what it is that they have invested in. Many investors in leveraged ETFs are not aware of the tracking error and erosion of value that takes place in these vehicles through time.

The ProShares website lists several considerations for what is called geared (leveraged) investing:

Most geared funds have one-day investment objectives: They aim to provide, before fees and expenses, a multiple (like 2x or -1x) of the return of a benchmark for a single day. For any period other than one day, the performance of a geared fund will not likely equal the benchmark return times the multiple stated in its one-day objective. This is due to the compounding of daily returns. Compounding affects all investments, and the effects are magnified for geared funds.

Over periods longer than a day, a geared fund’s returns tend to be greater than the multiple of benchmark returns stated in the fund’s objective if its benchmark trends upward or downward during the period.

Over periods longer than a day, a geared fund’s returns tend to be less than the multiple of benchmark returns stated in the fund’s objective if its benchmark experiences relatively high volatility during the period.

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