With the recent uncertainty in the markets due to natural disasters and geopolitical events, some may be looking at alternative ways to invest with their exchange traded funds (ETFs).
Leveraged and inverse ETFs are funds that aim to magnify the daily moves of the market. In a short double-leveraged fund, if the index goes up, then the fund goes down twice that amount. In a long leveraged fund, if the index goes up, the fund doubles that. The same principle applies when you’re talking about triple-leveraged ETFs, too.
Most leveraged and inverse ETFs have an objective to provide a daily multiple, for instance, plus or minus 200%. The funds have a daily target to limit risk of having too much leverage or of losing more than what’s in the fund.
These funds can be appealing to investors as a hedge against any potential losses. Say you have a holding but don’t really want to sell it and you think the market is due for a short-term correction, then a leveraged or inverse ETF can be used as a hedge.
They can also be used to capitalize on market movements. If an investor believes the market is due for a nice run, a leveraged ETF could be used to maximize on this movement.