Investors looking at leveraged and inverse exchange traded funds (ETFs) should pay attention to the fine print in those products, so that one may not find any surprises in the end.
Those that are fervent traders using leverage for anything longer than a day’s time is better off using a margin account, says Paul Justice for Morningstar.
Leveraged and short ETFs work better on a day-to-day basis, but over time, there tends to be tracking error as daily compounding takes a toll. These funds are not meant to be bought and held.
A case in point that demonstrates the divergence over time is the MSCI emerging market versus leveraged ETFs. Vanguard Emerging Markets Stock ETF (VWO) tracks the index and has lost value, Short MSCI Emerging Markets ProShares (EUM) provides the inverse of the index and has gained value, but UltraShort MSCI Emerging Markets ProShares (EEV) has lost value over the same period as the other emerging market ETFs.