Leveraged ETFs: A Comprehensive Guide to Understanding Risk and Returns

By using leverage with an ETF, investing can suddenly become a lot more interesting. While most people think of ETFs as a slow and steady type of investment, the advent of the leveraged ETF has started to make them a little riskier. ETFs that involve leverage are done in a different way than the traditional ETF. Here are a few things that you will want to understand about leveraged ETFs before you get involved. 

Debt and Equity

In order to successfully run a leveraged ETF, the fund managers have to borrow an equal amount of money to what they bring into the fund. Therefore, if they bring in $1 million in funds from customers, they also have to borrow another $1 million to buy shares with. Therefore, there is now $2 million in the fund to work with. 

Increased Risk and Reward

With this type of investment, you are getting an increase in possible returns, but you are also getting an increase in risk. If you get into the fund at the wrong time, you could lose a larger portion of your investment. At the same time, these funds have shown an increased rate of return as compared to most other traditional ETFs. Just be prepared for a different investment strategy when working with leveraged ETFs.