A leveraged ETF (exchange-traded fund) is an investment fund that borrows money, using current assets, to increase the returns(value) of the original index or asset.
What is a leveraged ETF, and how it operates?
My View What Is A Leveraged ETF:
Example: A leveraged ETF for the SPY, like the SPUU, appears to use its original holdings of SPY(the underlying ETF) to borrow (Leverage) money in order to buy additional SPY ETFs. Thereby increasing its number of SPY ETFs.
The goal is to increase the daily performance of the ETF by a factor of how many times it is leveraged, compared to the original underlying ETF holding.
Note: The multiplying returns, work in both directions. If the return is negative for the day, the leveraged ETF will be negative by how many times it’s leveraged.
Example: A double leveraged ETF, one that holds one group of ETFs then borrows(leverage) to buy additional ETFs, and double the total number of ETF holdings, can both gain and lose value twice as much as the original ETF.
Of course minus any borrowing fees.
If the SPY is down 10%, a double-leveraged SPY ETF could be down 20% for the day.
Now this increases for Triple leveraged ETFs. An ETF that borrows money to buy twice the original underlying ETF, such as UPRO.
If the SPY moves in any direction (+/-) the triple leverage ETF moves 3x’s.
This is not a perfect explanation, but how I view Leveraged ETFs for simplicity.
Thank you.
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