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, ...view middle of the document...
Leveraged and inverse ETFs, which are pre-packaged margin products, are commonly constructed by trading futures contracts or other derivatives and are created and redeemed in cash, rather than the basket transfer. Retail investors get access to these products when they become available on the exchanges.
Several factors account for the attention and attraction of leveraged and inverse ETFs. First, they enable investors, whether they are hedge funds, short-term traders, or retail investors, to trade their convictions, bullish and bearish, without short-sale restrictions commonly imposed on retail accounts. Second, ETFs provide a well-structured product for gaining leverage, while
maintaining the convenience of an exchange-listed product and limited liability.
Considering these benefits, some might think that these ETFs are a perfect product for traders and investors alike. The more cynical might instead ask: What’s the catch? What should investors be aware of and take into consideration before investing in ETFs?
Despite the ever-increasing volume and assets invested, the features of these funds still are not...