A leveraged index exchange-traded fund (ETF) can offer the potential for bigger gains compared to regular ETFs, but they can come with the risk for greater losses as well. These types of speculative investments should be carefully evaluated, so it’s in your best interest to employ the help of a trusted financial planner to manage all the moving parts. That’s where the experienced team at Miser Wealth Partners comes in.
What is a leveraged index ETF and how does it work?
Like a traditional ETF, a leveraged index ETF is a pooled investment that allows investors to gain exposure to many related assets through a single investment. A leveraged index ETF utilizes financial derivatives and debt to amplify the returns of an underlying index more so than a traditional ETF. However, that’s because instead of tracking the securities on a one-to-one ratio, a leveraged index ETF may aim for a two- or three-to-one ratio with the hopes of amplifying daily returns.
For example, consider a three-times leveraged S&P 500 leveraged index ETF. If the S&P 500 went up by 5% during the trading session, the leveraged ETF would go up by about 15%. On the other hand, if the S&P 500 value went down 10%, the leveraged ETF would drop by about 30%.
What are the benefits of a leveraged index ETF?
Leveraged index ETFs can offer the potential for significant gains that exceed the underlying index, which can be very alluring for a seasoned investor. Also, investors enjoy a wide variety of securities to trade using leveraged index ETFs with the potential to even make money in a declining market.
What risks are involved with leveraged index ETFs?
We won’t mince words – leveraged index ETFs aren’t for the faint-of-heart investor. These ETFs are not designed to be held for a long period of time because any actual loss could multiply quickly. These investments can carry a great deal of risk and should generally be avoided by long-term or passive investors. Leveraged index ETFs are designed for the risk-friendly investors who like to make short-term bets over the course of one trading session. ETFs are bought and resold over the course of a single session and can potentially produce significant losses.
That said, a double-leveraged ETF doesn’t necessarily mean an investor will see double the return of the index. The ease of investing in leveraged index ETFs may entice investors with little experience or understanding of this type of option, which is why having an experienced advisor to manage the risks is in your best interest. Miser Wealth Partners are extremely well versed on this investment strategy and are ready to help you determine if it’s a good option for you.
Can a leveraged index ETF go to zero or even in the negative?
Because leveraged index ETFs rebalance daily, they typically don’t lose all their value. However, they can fall to zero over time. When a leveraged index ETF approaches zero, the ETF manager typically liquidates the invested assets and pays out any remaining holders.
What fees are involved with leveraged index ETFs?
Just as with traditional ETFs, leveraged index ETFs involve a fee known as an “expense ratio,” which is expressed as a percentage. The expense ratio is charged to all ETF investors on an annual basis. Leveraged index ETFs are actively managed, as opposed to the more passively managed traditional ETFs. That means leveraged ETFs often have more expenses. Expense ratios for traditional ETFs typically range from about 0.03% to 0.4%, while leveraged ETFs average around 1.0%. This additional expense ratio for leveraged ETFs is attributed to managers having to pay regular fees to rebalance the ETF portfolio, launch new transactions, and pay the interest associated with borrowed money.
How are any gains from leveraged index ETFs taxed?
Since leveraged index ETFs aren’t typically held for much longer than a day, any capital gains from the sale of the ETF would be taxed at the short-term rate. The same goes for any losses.
What’s my next step to a leveraged index ETF in East Tennessee?
Whether you’re a seasoned investor or just getting your feet wet in the world of leveraged index ETFs, Miser Wealth Partners possess all the know-how to help you navigate this specialized investment strategy. Call us at (865) 281-1616 or click here to schedule a meeting, and let’s start a conversation.