Have you ever heard of leveraged ETFs? A leveraged exchange-traded fund (ETF) is a marketable security that uses financial derivatives such as options and debt in an attempt to amplify the returns of an underlying index. While a traditional exchange-traded fund typically tracks the securities in its underlying index on a one-to-one basis, a leveraged ETF may aim for a 2:1 or 3:1 ratio.
Leveraged ETFs are extremely volatile and are not suitable to all investors. Since they provide double or triple exposure to an underlying index, they have increased upside potential that comes along with greater downside potential as well.
Due to their volatility, leveraged and inverse exchange traded products are not designed for buy and hold Investors or investors who do not intend to manage their investment on a daily basis. These products are for sophisticated investors who understand their risks (including the effect of daily compounding of leveraged investment results), and who intend to actively monitor and manage their investments on a daily basis.
Expenses and Risks
Along with management and transaction fee expenses, there can be other costs involved with leveraged exchange-traded funds. Leveraged ETFs generally have higher fees than non-leveraged ETFs because premiums need to be paid to buy the options contracts as well as the cost of borrowing—or margining. Many leveraged ETFs have expense ratios of around 1% or more.
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