Etf Leverage

In: Business and Management

Submitted By jonnas101
Words 640
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Trading with leveraged and inverse ETFs:
Financial markets attract both professional and casual traders because of the variety of investment vehicles available. Among the newer entrants into this mix are leveraged and inverse exchange-traded funds ETFs. Lately, these products have been the subject of much attention and have attracted considerable assets.
Where traditional ETFs attempt to replicate the performance of a stock market index, leverage and inverse ETFs aim to achieve 2x or 3x long exposure, or
-1x, -2x, or -3x short exposure. This, and the accessibility of ETFs, creates a vast number of opportunities for investors of all levels. As with all investment vehicles, however, these ETFs are coupled with a large amount of risk. The structure of these funds also creates a number of unintended consequences on the markets and often leads to questions regarding investor suitability.
Since being introduced to the market in 2006, this ETF class has exploded with activity. According to “The Dynamics of Leveraged and Inverse Exchange-Traded Funds” by Minder Cheng and Ananth Madhavan, as of January 2009, 106 leveraged and inverse ETFs have been introduced in the U.S. market alone. The majority, however, of the $22 billion of assets under management , is in 2x and -2x leveraged products, with only a small percentage of the assets under management allocated to the greater leveraged and inverse ETFs.
Traditional ETF vs. ETF Leverage:
The difference between traditional ETFs and leveraged and inverse ETFs goes further than just their exposure to returns. The construction of these investment vehicles also is different.
Regarding traditional ETFs, authorized participants such as institutional investors directly buy and sell creation large groups of tens of thousands of shares. These usually are exchanged with a fund manager for an “in-kind” or basket…...

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