(1888PressRelease)
March 15, 2010 - An interesting development in the exchange traded fund (ETF) arena has been the creation of leveraged ETFs. A leveraged ETF is created to produce a 2x or 3x the return of its underlying index. Unlike normal ETFs which are designed to replicate and index or commodity, the leveraged ETF is designed to create exponential returns. Moreover, the goal of a standard ETF is not to outperform the correlating investment, but to give investors a beneficial way to mimic price. Leveraged ETFs provide a higher risk reward payoff. In contrast to standard ETFs a leveraged ETF does want to outperform the index or commodity they track. A leveraged ETF looks to provide 2 to 3 times the return of the underlying asset. So if the tracked index rises 1%, a 2x leveraged ETF wants to create a 2% ROI. You can obtain a list of leveraged ETFs from www.etffunds.com.au
Leveraged ETFs can also increase in value in a falling market. Such an ETF is called an inverse ETF and can also be leveraged which would offer multiple positive return if an index declines in value.
There is a lot of controversy surrounding leveraged ETFs. Higher risk, borrowing issues, tracking errors, and even issues surrounding the short and long term performance results. Contrary to popular belief, leveraged ETFs are constructed to create a multiple return on the daily performance of the underlying index and not in any other time frame. For example with a 2x leveraged ETF, the simple concept is that if the index rises 1%, the leveraged ETF should create a 2% return on a daily time frame, not a weekly or any other time frame.
Leveraged ETFs are designed to include the securities in the underlying index, but also include derivatives of the securities and the index itself. These derivatives include, but are not limited to, options, forward contracts, swaps and futures.
In summary leveraged ETFs are fast-becoming one of the most popular types of ETFs. And whilst they are an aggressive new ETF innovation, they are also very controversial. There are other issues such as tracking errors, borrowing complexities and other constraints.
www.etffunds.com.au is a website dedicated to ETFs. Whether you're an individual investor interested in learning about ETFs or a financial advisor using ETFs for high networth clients the ETF Fund website will have the answer.
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