3 Reasons to Buy SSO, and 2 Reasons Not To

Even the biggest fans of exchange-traded funds (or ETFs) will acknowledge they have one big drawback. That is, although they're an easy way of passively participating in the market's overall strength, exchange-traded funds aren't going to beat the market or outperform their most relevant benchmark. They're merely going to match it, at best. And in an environment where at least a few investors are doing very well by picking the right individual stocks, this limitation can be a little frustrating.

What if, however, you could give yourself a realistic shot at beating the market by owning ETFs rather than diving into individual stock-picking?

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As it turns out, there is. So-called leveraged funds can make this happen for you. And perhaps one that would be most familiar and palatable to most investors is the ProShares Ultra S&P 500 (NYSEMKT: SSO). Here's everything interested investors not familiar with this sort of ETF will need to know before making such a trade.

What is an "Ultra" ETF?

Don't be intimidated by the name. While ProShares uses the word "ultra" for its particular exchange-traded funds of this type, they're just part of a broader category of funds typically referred to as "leveraged." That just means whatever its underlying index does, with some help from futures and options, the fund in question does it to a greater degree. In the case of the ProShares Ultra S&P 500, it moves twice as much as the S&P 500 index (SNPINDEX: ^GSPC), although some leveraged ETFs and mutual funds can move up to 3 times as much as the index they mirror.

Image source: Getty Images.

The catch? It works both ways. When the S&P 500 is losing ground, ProShares' SSO is falling to the tune of twice as much. That can get real scary, real fast, if it doesn't feel like the selling is going to stop anytime soon. And most investors don't make their best decisions when they're afraid.

Still, these funds have their place for investors who understand all their pros and cons and can manage them appropriately.

Three reasons to buy the ProShares Ultra S&P 500 ETF

There are three big reasons to step into a stake in SSO.

1. As long as the market rises, this fund will beat it: The top reason to own this leveraged index fund is the same reason to own any broad-based index fund: to plug into the stock market's reliable (even if uneven) long-term growth. If you're committed to the idea of indexing for the long haul, you'll do about twice as well indexing using the ProShares Ultra S&P 500 ETF. Not bad. Doubling the broad market's performance can make a massive difference in the eventual size of your nest egg.

2. It's easy to own, with little to no maintenance required: Usually, achieving this sort of superior return requires more work -- or at least more ongoing oversight -- of a portfolio's holdings. Not with this fund, though. SSO is just as easy to buy and hold as the popular and more familiar SPDR S&P 500 ETF Trust (NYSEMKT: SPY). They trade the exact same way.

3. SSO offers an easy way of making more of relatively modest market moves: But if you're not necessarily looking for an actual "forever" investment in an index, that's OK. Although a passive, buy-and-hold approach tends to fare better than a strategy that requires more frequent trading, if you're only looking to squeeze a little bit more out of the market by capitalizing on some of its near-term moves, the ProShares Ultra S&P 500 ETF makes it worth the effort. A modest short-term 5% gain from the S&P 500 would be a more meaningful 10% advance from SSO in a relatively short period of time.

Data by YCharts.

Two reasons not to buy SSO

Every investment choice is a trade-off, of course. You tend to achieve less capital growth from income-oriented stocks, for instance, while commodities tend to perform well at different times than equities.

The ProShares Ultra S&P 500 ETF is no exception to this paradigm. While it's got its obvious upsides, there are two downsides that should be well considered before diving in.

1. It's stress-inducingly volatile: The idea of capturing more than the market's typical long-term upside is compelling enough. But SSO's exaggerated setbacks when stocks are suffering losses can be stressful. This in and of itself isn't necessarily the end of the world. Many veteran investors remain fully invested going into and during bear markets, knowing stocks will eventually recover. Most investors know the ProShares Ultra S&P 500 ETF will as well.

When it's impossible to ignore the size of even just a temporary plunge this ETF is experiencing though, the likely panic can easily prompt you into making an ill-timed decision. More to the point, you may end up bailing out of this rapidly falling position before it's ready to recover. If you're not truly committed to a long-term play on the overall market, buying this exchange-traded fund could end up doing your portfolio more harm than good.

2. SSO isn't exactly cheap either: The ProShares Ultra S&P 500 ETF is also fairly expensive to run ... at least in comparison to seemingly similar funds. Whereas the aforementioned SPDR S&P 500 ETF Trust's annual expense ratio is a little less than 0.1% of its total assets, the ProShares ETF's expense ratio is much frothier at just under 0.9%.

For some investors, this higher net cost may be worth it. After all, you're achieving a much bigger long-term gain than more straightforward index funds are capable of producing. This higher operating cost does crimp total upside potential in perpetuity, though, and you're paying this premium for the right to suffer above-average volatility and take on above-average risk.

Can you handle it?

But is it worth owning? That depends on you. Or more specifically, that depends on whether or not you can accept and manage this ETF's unique downsides in exchange for its market-beating potential.

For what it's worth though, too many investors who delve into leveraged ETFs with plans to only hold them for a short while often end up undermining their own performance. Timing the market is still notoriously difficult.

Rather, your best bet with the ProShares Ultra S&P 500 ETF is buying into it with the same "forever" mindset you'd step into a more conventional index fund with, and then sticking with it even when things get ugly, knowing that -- given enough time -- the market will always eventually move higher. If you know that's not you, stick with the less volatile index funds that won't shake you out at the worst possible time.

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