Leveraged ETF

Leveraged ETF is an ETF that uses leverage to amplify the profits. Leveraged ETFs aim to offer a constant leverage of 2:1 or 3:1 during the investment time frame. Through this facility, traders can double the amount of profits. However, commissions and management fees can decrease the total profits.[br]

Leveraged ETF is an ETF that uses leverage to amplify the profits. Leveraged ETFs aim to offer a constant leverage of 2:1 or 3:1 during the investment time frame. Through this facility, traders can double the amount of profits. However, commissions and management fees can decrease the total profits.[br]

 

How a Leveraged ETF Works

A leveraged ETF works on daily basis. This means that the leverage is applied to the daily transactions. With a leveraged ETF of 2:1, an investor gets two dollars for every dollar. Suppose an investor wants to invest in an ETF that costs $1000, the ETF managers will invest $1000 more on his behalf.

 

However, leveraged ETFs are like double sided swords. When the value of the ETF dips, then the losses are amplified. Leveraged ETFs are not advisable or meant for the typical buy and hold strategy of trading.

 

Advantages of Leveraged ETF

 

The best part about leveraged ETF is that they can fill losses quickly than the normal ETFs.

 

The advantages are:

• Leveraged ETFs meet their goals on almost daily basis. They are successful at doubling the profits every day with rare failures.

• With leveraged ETFs, a trader increases his exposure to the different markets. He spends less yet reaps more profits in fields like oil, natural gas, and gold.

• Leveraged ETFs have a lower management expense ratio than the other actively managed funds. Even though they decrease profits, they do not negate profits like the actively managed funds.

• Leveraged ETFs can be used to lower your portfolio volatility even with smaller investments. They diversify the portfolio and decrease risk.

• Leveraged ETFs multiply profits as well as your losses. However, the advantage with leveraged ETF is that you will not lose more than what you invest. Thus, no margin deposits or other compensating deposits are required.[br]

 

Disadvantages of Leveraged ETF

 

Leveraged ETFs have some disadvantages, which are:

• When the market breaks even after days of bulls and bears, a leveraged ETF may still incur losses. This happens as the leveraged ETFs are highly sensitive to the market’s volatility and their value is calculated daily rather than at the end of a cycle.

• Leveraged ETFs cost more in management expense ratio than other regular ETFs.

 

Leveraged ETFs are meant for the experienced traders who can weigh the risks and use leverage as an advantage than as a disadvantage.