ETF Trends
ETF Trends

Everyone knows about short and leveraged exchange traded funds (ETFs), but some might be wondering "How do they do that?"

Michael Sapir, CEO of ProFunds, gave us a call and explained it. "The best way to understand how a [short or leveraged]fund works is to compare how an S&P fund works."

If, at the end of the day, there is $100 in this fund, the manager of that fund will want to take that $100 and get the equivalent exposure to the S&P. Exposure can be had in several ways:

  • By buying securities that make up the S&P, in the same proportion that they’re in the index
  • Buy futures contracts on the S&P
  • Swap agreements with counterparties

"What you want is an accumulation of stuff, baskets of securities that represent the S&P that relate to the amount of money you have in the fund," says Sapir.

Long and short ETFs work in a similar way.

A long fund, such as the Ultra S&P 500, seeks to double the returns of the S&P 500. That means when the index goes up, your returns will double that.

If a fund looking to double the S&P has $100, "We want to have stuff in our fund that gives it exposure of roughly $200 to the S&P."

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