A leveraged exchange-traded fund (ETF) is a marketable security that uses financial derivatives and debt to increase 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 available for most indices, such as the Nasdaq 100 and the Dow Jones Industrial Average (DJIA). If for example, the value of the underlying index increases by 1% then the value of the leveraged ETFs would jump up by 2 to 3%. The extent of the gain is contingent on the amount of leverage used in the ETF. Leverage, however, can also operate in the opposite direction and result in investor losses. Hence Leveraged ETFs are like a double-edged sword and the investor needs to be aware of the risks that are far higher than those from traditional investments. Also, the management fees and transaction costs associated with leveraged ETFs may reduce the returns.
Leveraged ETFs are mostly used by traders in speculative trading to take advantage of short term momentum on the security index. They are very rarely a long term bet.
Brokers and financial advisors are expected to elucidate the risks of Leverage ETFs to the investors. They also need to disclose other prevailing factors in the financial market for recommending Leveraged ETFs and also asses the investor’s requirement and risk appetite before recommending the leveraged ETFs.
If you feel you have been tricked into leverage ETF investment by your advisor or brokerage, then please reach out to us and we are ready to provide you with the legal recourse anywhere in the world.