7968 / What is a leveraged ETF?

A leveraged ETF does not amplify the annual returns of an index; instead it follows the daily changes. For example, in the case of a leveraged fund with a 2:1 ratio, each dollar of investor capital used is matched with an additional dollar of invested debt. On a day in which the underlying index returns 1 percent, the fund will theoretically return 2 percent. The 2 percent return is theoretical, as management fees and transaction costs diminish the full effects of leverage.

The 2:1 ratio works in the opposite direction as well. If the index drops 1 percent, the fund’s loss would then be 2 percent.

Leveraged funds have been available since the early 1990s. The first leveraged ETFs were introduced in the summer of 2006, after being reviewed for almost three years by the Securities and Exchange Commission. The goal of a leveraged ETF is for future appreciation of the investments made with the borrowed capital to exceed the cost of the capital itself.