Leveraged Exchange-Traded Funds (ETFs)
A leveraged exchange-traded fund (ETF) uses financial debt to amplify the returns of an underlying stock. An investor can think of an ETF like a mutual fund that trades like a stock. Many investors are attracted to ETFs because of their low cost and the ability to actively trade them. Leveraged ETFs are generally available for most indexes like the S&P 500 and Nasdaq 100. A leveraged ETF does not amplify the annual returns of the index it tracks. For example, a leveraged ETF with 300% leverage will return 3% if the underlying index returns 1% by taking out debt to increase the investment.
Leveraged ETFs are generally used for short term trading. As the Securities Exchange Commission has warned: Most leveraged ETFs reset daily, meaning that they are designed to achieve their stated objectives on a daily basis. Their performance over long periods of time can differ significantly from the performance of their underlying index or benchmark.
Brokers should explain the risks of ETFs to investors before recommending them. Investors should recognize their risks and fully understand those risks before investing. If your broker recommended leveraged ETFs to you without explaining the risks, you should contact Gana Weinstein LLP.