What is leveraged etf

Q: What are the tax consequences of leveraged ETFs?

A: The potential tax efficiency of ETFs has been one of the major reasons for the surge in popularity of these products relative to traditional mutual funds. While leveraged ETFs have the potential to offer tax advantages, the issue is slightly more complex that the environment surrounding traditional ETFs.

Unlike most ETFs, leveraged ETFs generally keep a significant portion of their assets in cash, entering into swap agreements and futures contracts to achieve the desired exposure. If authorized participants redeem shares of the fund, the issuer must sell some of the underlying derivatives. If the fund has posted big gains during the year, this transaction can incur capital gains.

Capital gains distributions from leveraged ETFs became an issue in 2008 when Rydex reported distributions of as much as 70% of fund assets. In 2009, Direxion reported moderate capital gains on some of its funds while ProShares reported zero capital gains distributions.

Q: How can a Bull and Bear ETF that track the same index have a negative return for the same period?

A: Over periods of time that are longer than the fund’s stated holding period, especially when markets experience significant market volatility, investment results can vary. The path of the benchmark index during these longer periods may be at least as important to the fund’s return as the cumulative return of the benchmark for the period.

As a result, even though the benchmark index had a positive return, a bull fund that tracks it can have a negative return, due to the product of the daily (or monthly in the case of funds tracking a monthly holding period) events that take place during the said time period.

Q: What are some common uses for leveraged and inverse funds?

A: Leveraged funds are often used to help manage risks in other investments and allow investors to hedge their exposure to sectors they are overweight in. They are also often used to capture returns while eliminating market or sector exposure or to overweight a particular sector by using minimal amounts of cash.

Q: Can I lose more than my initial investment in short leveraged funds?

Source: etfdb.com

Category: Forex

Similar articles: