Leveraged ETFs

In ETFs on 25/05/2010 at 6:45 am

A leveraged ETF seeks to deliver a daily return that is a multiple of the return of the underlying index while an inverse ETF provides the opposite performance to the benchmark.

As these instruments reset every day, an investor who maintains a position for more a single day may find his exposure to potential losses if the market turns against him is larger than anticipated due to the effects of compounding.

Regulators have expressed their concerns about the suitability of leveraged and inverse for retail investors, particularly in volatile markets.

ProShares, which offers 19 leveraged and inverse ETFs benchmarked to a variety of regions and countries ,has a “Facts and Fallacies about Leveraged Funds”page on its website.

If you are investing in an ETF because you want to invest in a low-cost index fund (Warren Buffett thinks that most investors shld do so; and so does Tan Kin Lian and his Fisca), make sure you are not investing in leveraged and inverse ETFs.Invest only only in ETFs that are cash-based i.e. that do not use derivatives to track the indices.


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