Understanding the Basics of Leveraged ETFs | Page 2 of 2 | ETF Trends

Barclays Capital notes that investors have a choice between two distinct types of leveraged products: daily reset and static funds.

Daily reset funds will try to reflect 2x or 3x the daily return of an underlying index. The key point is that these funds are based off the daily performance of the underlying index. As a result of daily rebalancing, the multi-day return will not perfectly reflect a 2x or 3x performance of the underlying index. Additionally, the daily reset ETFs may underperform during highly volatile situations and outperform during low volatility.

Static products will provide leveraged returns over a multiple-day period. The return of this type of ETF will try to reflect the stated leverage at trade multiplied by the total return of the underlying benchmark — so, a fund might reflect 2x or 3x performance of an underlying benchmark over a multi-day period. However, a static product will stop trading and will be recalled at the ending net asset value if the NAV dips below a predefined point.

For more information on leveraged funds, visit our leveraged ETFs category.

Max Chen contributed to this article.