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Thread: 4X ETF On The Way

  1. Default 4X ETF On The Way

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    Default Re: 4X ETF On The Way

    A little dangerous and should probably only be used for very short-term trades because of the way they are re-balanced daily. Here's more on that...

    Dissecting Leveraged ETF Returns

    Daily Rebalancing

    Maintaining a constant leverage ratio, typically two-times the amount, is complex. Fluctuations in the price of the underlying index change the value of the fund's assets, and this requires the fund to change the total amount of index exposure.

    Example - Rebalancing a Leveraged ETF

    Suppose a fund has $100 million of assets and $200 million of index exposure. The index rises 1% in the first day of trading, giving the firm $2 million in profits. (Assume no expenses in this example.) The fund now has $102 million of assets and must increase (in this case, double) its index exposure to $204 million. Maintaining a constant leverage ratio allows the fund to immediately reinvest trading gains.
    This constant adjustment, also known as rebalancing, is how the fund is able to provide double the exposure to the index at any point in time, even if the index has gained 50% or lost 50% recently. Without rebalancing, the fund\'s leverage ratio would change every day and the fund\'s returns, as compared to the underlying index, would be unpredictable.
    On the psychological side, it could be the sign that we're near a market top.


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