Leveraged ETF

Loading the player...

What is a '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.

BREAKING DOWN '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%.

RELATED TERMS
  1. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  2. Index ETF

    Exchange-traded funds that follow a specific benchmark index ...
  3. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  4. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company ...
  5. ETF Of ETFs

    An exchange-traded fund (ETF) that tracks other ETFs rather than ...
  6. Leverage Build Up

    The accumulation of additional debt to enter a position that ...
Related Articles
  1. Mutual Funds & ETFs

    Common ETFs

    Common ETFs
  2. Mutual Funds & ETFs

    Understanding Leveraged ETFs

    A leveraged ETF uses financial derivatives and debt to amplify returns in relation to an underlying index.
  3. Financial Advisors

    Why Leveraged ETFs Are Not a Long-Term Bet

    Leveraged ETFs aren't for the average investor. They can, however, present significant upside potential for the right type of trader.
  4. Mutual Funds & ETFs

    ETFs Can Be Safe Investments, If Used Correctly

    Learn about how ETFs can be a safe investment option if you know which funds to choose, including the basics of both indexed and leveraged ETFs.
  5. Mutual Funds & ETFs

    Leveraged ETFs: Are They Safe? (BLK, WETF)

    Discover why leveraged ETFs are not necessarily a doomsday product. Learn the opinions of BlackRock’s Larry Fink and other industry experts on these products.
  6. Mutual Funds & ETFs

    Introduction to Leveraged ETFs

    Leveraged exchange-traded funds have appeared that are designed to move either conversely or inversely to their underlying benchmark, which may be either a financial index or a specific segment ...
  7. Mutual Funds & ETFs

    Buying ETFs on Margin Versus Leveraged ETFs

    Leveraged ETFs and investing in an ETF on margin both have their advantages and disadvantages.
  8. Mutual Funds & ETFs

    How To Avoid Expensive ETFs

    Discover four tips for avoiding expensive ETFs. Learn why expense ratios should be low and how to prevent your investment from costing you come tax time.
  9. Mutual Funds & ETFs

    4 Mistakes to Avoid When Trading Leveraged ETFs

    Learn the common mistakes made with leveraged ETFs, and discover how you can lose money even if you are right on the direction of a market sector.
  10. Mutual Funds & ETFs

    Understanding Taxation On Leveraged ETFs (YCS)

    Read about the potential tax implications for investors of leveraged exchange-traded funds, or ETFs, and learn why leveraged ETF taxation can be so complicated.
RELATED FAQS
  1. Are there leveraged ETFs that follow the retail sector?

    Read about leveraged exchange-traded funds (ETFs) that track the retail sector, and why using leveraged ETFs can be a boom-bust ... Read Answer >>
  2. Can mutual funds use leverage?

    Learn about what types of mutual funds use leverage, how leverage can increase returns and what restrictions are in place ... Read Answer >>
  3. Besides operating leverage, what are other important forms of leverage for businesses?

    Learn about what other forms of leverage exist for businesses besides operational leverage, and the primary leverage metrics ... Read Answer >>
  4. Are there leveraged ETFs that track the financial services sector?

    Discover some of the leading companies offering leveraged ETFs today and learn specifically what leveraged ETFs are available ... Read Answer >>
  5. What are the risks of having both high operating leverage and high financial leverage?

    In finance, the term leverage arises often. Both investors and companies employ leverage to generate greater returns on their ... Read Answer >>
  6. What's the difference between an index fund and an ETF?

    Learn about the difference between an index fund and an exchange-traded fund and how index fund investing compares to value ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center