1. An ETF is a portfolio of stocks, bonds or other investment class that trades on a stock exchange, much like a regular stock does. ETFs are essentially index funds in that they track the performance of a specific index or asset.
2. Leveraged ETFs attempt to track the index with borrowed capital in order to increase investment exposure. The fund will typically be levered by a factor of two or three for every dollar of investor capital. However, it is important to note that these levered ETFs attempt to mirror the daily rate of change for an index. They then reset each night and attempt to repeat this feat each day. For instance, if the Russell 2000 trades up 1% for the day, the 2x tracking ETF will attempt to match that with a factor of two, or 2%. The 3x version would follow at 3%. The farther out in time you go, the less correlated the returns will be.
3. However, with the additional leverage comes additional risk. If traders are not careful, they could find themselves in a world of pain. A common mistake with some traders is trading a leveraged ETF withmargin. This can exacerbate what is already a volatile trading vehicle into a surefire margin call.
3. However, with the additional leverage comes additional risk. If traders are not careful, they could find themselves in a world of pain. A common mistake with some traders is trading a leveraged ETF withmargin. This can exacerbate what is already a volatile trading vehicle into a surefire margin call.
No comments:
Post a Comment