Strategic ETFs: Leveraged, Inverse, and Leveraged Inverse
Leveraged ETFs
Leveraged ETFs are designed to amplify the daily return of an underlying index. For example, a 2x leveraged ETF will aim to deliver twice the return of the index on a daily basis.
How Leveraged ETFs Work
Leveraged ETFs use financial instruments such as derivatives to achieve their desired leverage. They can be either long or short the underlying index, depending on their investment strategy.
Inverse ETFs
Inverse ETFs aim to provide the opposite return of an underlying index. For example, a -2x inverse ETF will attempt to deliver a return that is twice the negative return of the index.
How Inverse ETFs Work
Inverse ETFs typically employ inverse or inverse-like investments to generate their returns. They can include shorting the underlying index, using synthetic shorts, or employing other derivative strategies.
Leveraged Inverse ETFs
Leveraged inverse ETFs combine the characteristics of both leveraged and inverse ETFs. They aim to provide a magnified return in the opposite direction of an underlying index. For example, a -3x leveraged inverse ETF will target a return that is three times the negative return of the index.
Important Considerations
While these ETFs can offer potential returns, it is crucial to note that they also carry higher risks. They are suitable for experienced investors who understand the potential volatility and risks associated with such investments.
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