Leveraged ETF Center
How To Implement An Effective Rebalancing Plan
Most traders move in and out of leveraged ETF positions within a single trading session, as the objectives that they use these funds to accomplish are short-term in nature. But an increasing number of advisors have begun using leveraged ETFs over extended time periods to generate amplified returns on trends that may not play out in a single trading session. Since leveraged ETFs compound daily returns, returns over multiple trading sessions can often result in unpredictable returns, particularly in seesawing markets. But by using a relatively simple rebalancing plan, advisors can increase the likelihood that returns on leveraged ETFs will closely correspond to an intended multiple of the related index.
Under The Hood Of Leveraged ETFs
Since their introduction in 2006, leveraged ETFs have attracted tens of billions of dollars in cash inflows and become immensely popular among investors looking to accomplish a variety of objectives. As scrutiny of these products has intensified, the conception that leveraged ETFs are overly-complex products beyond the grasp of most investors has spread. While many of the intricacies surrounding leveraged ETFs are far from simple, the underpinnings and mechanics of these products are actually quite simple.
Leveraged ETF Report Card: A Closer Look At Performance
Much of the controversy surrounding leveraged ETFs has focused on the performance results delivered by these products over extended periods of time. A common criticism has been that leveraged ETFs don’t perform as they should or as they are advertised to. In reality, however, most leveraged ETFs actually do a very good job of accomplishing their stated objective. The disconnect that has stirred debate, investigations, and ultimately regulations issue that arises is not between actual performance and stated objectives, but rather between investor expectations and a disconnect between investor expectations and the goals outlined in the prospectus.
Rebalancing Act: A Primer On Leveraged and Inverse ETFs
Leveraged ETFs have become tremendously popular tools for investors looking to accomplish a wide variety of objectives, including hedging existing positions or amplifying exposure to market movements. In this working paper, Raymund Wong and Kara Hargadon analyze some conceptions surrounding leveraged ETFs and the returns exhibited by these products over certain historical periods.
The Other Side Of The Leveraged ETF Coin
Much of the confusion over leveraged ETFs has focused on the performance of these funds when held for multiple trading sessions. After the unprecedented volatility of 2008, many investors were left with the impression that leveraged ETFs are bound to erode returns over extended periods of time, resulting in returns that vary in magnitude and perhaps even direction from a simple multiple on the return generated by the underlying index.
These risks are very real, and necessitate the frequent monitoring (and perhaps rebalancing) of any leveraged investment. But there’s a good chance of compounding working for investors as well. In certain environments — such as the impressive rally of 2009 — the compounding effect of leveraged ETFs can work for investors (or at least for those who made the correct directional call).
Leveraged ETFs In The News
- It’s A Wonderful Rally (Wall Street Journal, December 2009): In a follow-up to a previous article, James Stewart reports on his experiences with leveraged and inverse ETFs. “Indeed, there’s such an array of innovative products now available that even small investors can mimic strategies once reserved for professionals,” writes Stewart.
- Trading Leveraged ETFs: No One’s Complaining In A Bull Market (Seeking Alpha, January 2010): David Fry reflects on the his use of leveraged ETFs to accomplish investment objectives. “We’ve been able in a short period of time to capture 5-7% returns and more over short time periods as previously described,” writes Fry. “Naturally, not all trades are successful and losses of a similar amount have also been experienced. Nevertheless, all things considered, when winners exceed losers by a significant amount, then this is a suitable methodology for the most aggressive investors”
- See all news stories from ETF Database on leveraged ETFs here.
More Leveraged ETF Resources
A collection of resources from around the Web providing further education on leveraged ETFs:
- Today’s Best-Performing Leveraged ETFs
- Today’s Worst-Performing Leveraged ETFs
- Understanding The Returns Of Leveraged And Inverse Funds in the Journal Of Indexes
- The Universal Effects Of Compounding and Leveraged ETFs at ProShares.com
- Components of Leveraged and Inverse Funds from ProShares.com (pdf)
- Guide to Commodity ProShares from ProShares.com (pdf)
- Guide to Currency ProShares from ProShares.com (pdf)
- Understanding Taxable Distributions from Direxion.com (pdf)
- Understanding the Impact of Changing Market Exposure on Leveraged ETFs from Direxion.com (pdf)
