| Levearged ETFs |
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| Written by Wilfred Ling | ||||||
| Sunday, 04 May 2008 | ||||||
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There has been many leveraged ETFs available these days. Most of them are either leveraged x2 in the long or short side. But what many do not know is that the leverage of twice does not necessarily magnify your gains/lost by twice. Here are some examples to illustration why: Let's consider an ETF that leveraged by twice on a long side. THe 200% exposure is based on a daily return. This means that if the underlying moves by +1% in a day, the ETF will move by +2%. Quite simple right? Wrong! Let's say the underlying move by -0.08851% daily for the next 252 days (i.e. one year). A non-leveraged ETF will yield (1-0.08851%)^252 – 1 = -20% in return. For a leveraged 200% ETF, it will yield (1- 2 * 0.08851%)^252 – 1 =-36.01% in return. Surprising? It is because the leveraged is based on a daily time horizon. To put it mathematically, (1 + 2 * D) ^ P – 1 ≠ 2 * [ (1 + D) ^ P – 1 ] Most leveraged ETFs are based on daily return.
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