An exchange-traded fund (ETF) that utilizes financial products and monies due to enlarge the returns of an underlying index. Leveraged ETFs are accessible for almost all indexes, like the Nasdaq-100 as well as the Dow Jones Industrial Average. These funds are directed to hold a continual amount of leverage during the investment time frame, for example a 2:1 or 3:1 ratio.
Most bull and bear ETFs are leveraged. 2x and 3x leveraged ETFs do not guarantee a 200% or 300% return on their underlying index or asset, even though that is the goal. Also, the return is expected on the daily return, not the annual.
3x ETFs use a variety of complex, exotic financial instruments to generate multiplicative returns, both positive and negative. In order to obtain these returns, these ETFs creates long or short equity positions. They invest around 80% of their assets in equity securities which will not generate daily returns of 3x of the target index. To accomplish this, the balance of the fund assets are invested into futures contracts, options on securities, indices and futures contracts, equity caps, collars, and floors, swap agreements, forward contracts, and reverse repurchase agreements.
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