Leveraged ETF

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DEFINITION of 'Leveraged ETF'

An exchange-traded fund (ETF) that uses financial derivatives and debt to amplify the returns of an underlying index. Leveraged ETFs are available for most indexes, such as the Nasdaq-100 and the Dow Jones Industrial Average. These funds aim to keep a constant amount of leverage during the investment time frame, such as a 2:1 or 3:1 ratio.

INVESTOPEDIA EXPLAINS 'Leveraged ETF'

A leveraged ETF does not amplify the annual returns of an index; instead it follows the daily changes. For example, let's examine a leveraged fund with a 2:1 ratio. This means that each dollar of investor capital used is matched with an additional dollar of invested debt. If one day the underlying index returns 1%, the fund will theoretically return 2%. The 2% 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%, your loss would then be 2%.

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    The most common leveraged exchange-traded funds (ETFs) that track the pharmaceutical industry are the two offered by Proshares: ... Read Full Answer >>
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    An exchange-traded fund (ETF) is a security that follows an index (or a set group of commodities or assets) but trades the ... Read Full Answer >>
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    There are a limited number of leveraged exchange-traded funds that track the metals and mining sector. Investors utilize ... Read Full Answer >>
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    A few leveraged ETFs are used to track the oil and gas drilling sector, which includes vast, multinational companies such ... Read Full Answer >>
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