Download Leveraged Exchange-Traded Funds: A Comprehensive Guide to by Peter Miu, Narat Charupat PDF

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By Peter Miu, Narat Charupat

Leveraged Exchange-Traded money (LETFs) are publicly-traded money that promise to supply day-by-day returns which are in a a number of (positive or destructive) of the returns on an index. to fulfill that promise, the cash use leverage, that's in general got via derivatives resembling futures contracts, ahead contracts, and total-return swaps. As of the top of 2012, there have been over 250 LETFs in North the USA with overall resources of roughly $32.24 billion. whereas the volume of resources held through those cash remains to be small, their acceptance maintains to develop as their buying and selling quantity is considerably greater and masses extra dynamic than conventional, non-leveraged ETFs.

This complete consultant to LETFs presents high-level practitioners and researchers with a close reference software for navigating the marketplace and making trained funding judgements. Written from a measured analytical standpoint, Miu and Charupat use transparent and concise reasons of all vital elements of LETFs, targeting such key components as constitution, pricing, functionality, rules, taxation, and buying and selling thoughts. the 1st chapters set the degree for the ebook by means of picking out precisely what LETFs are and the way they're regulated. the next chapters then glance to bridge conception with perform to dive deep into the mechanics, portfolio rebalancing innovations, and day-by-day compounding results that make making an investment in those cash so lucrative.

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As monthly LETFs follow the same logic, our discussion also applies to them. 24 Leveraged Exchange-Traded Funds To be able to deliver LETFs’ promised returns, funds companies use leverage. Leverage can be acquired by borrowing. For example, when a fund company sells a +2x LETF to an investor, it will invest the investor’s money in the underlying benchmark. , exposure to the benchmark) is now 200% of the investor’s investment. The fund will maintain this exposure ratio through time, which means that the dollar amount that it borrows will keep changing depending on how the underlying benchmark moves.

Moreover, the performance will be especially poor in a sideways market as opposed to an up-trending or down-trending market. Everything else being the same, the higher the leverage ratio and the longer the holding period, the stronger is the compounding effect. For a detailed discussion on the effect of compounding on tracking errors and how it may be analytically related to the characteristics of the realized return path of the benchmark index, please refer to chapter 6. We should add that a recent study by Loviscek et al.

3 LETFs have two major categories of expenses. First, there are management fees, which cover various costs such as investment advisory fees, administration expenses, custodial expenses, legal expenses, index licenses, and distribution fees. These fees vary from one fund company to another, and also from one fund to another. Second, the investors are charged with the transaction costs of leverage, investing and hedging. These costs include brokerage fees and interest charges (if physical replication is used) and/or derivatives premiums (which reflect interest expenses and hedging costs that counterparties to the derivatives contracts incur).

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