Leveraged products try to magnify the performance of an underlying index over a daily basis. Consequently, due to the compounding effects, investors may enjoy higher gains, but they must also be willing to accept heavier losses, especially in volatile market conditions.
For instance, if a leveraged ETF rises 10% in one day and falls 10% the next, the ETF will end up slightly lower than when it first started. If the starts by falling 10% on the first day, it will require an increase of a little over 11% to get back to its starting price.
However, in steadily increasing markets, such as in stocks last year, the compounding effect has been working for the leveraged ETFs.
For more information on geared products, visit our leveraged ETFs category.
Max Chen contributed to this article.