ETFs are groups of different types of investments that are lumped together into a single entity which can then be traded on major stock exchanges and offer shares for investors to purchase. Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund does. ETFs experience price changes throughout the day as they are bought and sold.
Leveraged ETFs, also known as “bull” ETFs, seek to deliver multiples of the performance of the index or benchmark they track. While a traditional ETF tracks the securities in its underlying index on a 1:1 basis, leveraged ETFs typically aim for a 2:1 or 3:1 ratio. These are called double- and triple-leveraged ETFs, respectively.
Inverse ETFs, also known as “short” ETFs or “bear” ETFs, seek to deliver the opposite of the performance of the index or benchmark they track. Inverse ETFs are sold as a way for investors to profit from, or at least hedge their risk from, downward moving markets.
Leveraged inverse ETFs, or “ultra short” ETFs, seek to achieve a return that is a multiple of the inverse performance of the underlying index or benchmark.
No. ETFs are unlike mutual funds, which are not traded on an exchange and only trade once per day after the markets close. Additionally, unlike mutual funds, ETF shares have limited redeemability.
Investors who want to sell their ETF shares have two options: (1) they can sell individual shares to other investors on the secondary market, or (2) they can sell their units back to the ETF. ETFs generally redeem their shares by giving investors the securities that comprise the portfolio instead of cash.
The SEC and FINRA have issued investor alerts because individual investors may be easily confused about the performance objectives of leveraged and inverse ETFs. Leveraged and inverse ETFs are typically designed to achieve their stated performance objectives on a daily basis, but investors may invest with the expectation that the ETFs will meet their stated daily performance objectives over the long term. ETFs use derivatives, swaps, and futures contracts to accomplish intended performance objectives and require a daily reset of the portfolio holdings which results in a tracking error over time.
Due to the tracking errors over time and the effects of leverage, the performance of an ETF can differ greatly from the performance of the underlying basket of securities, indexes, currencies, or commodities. Investors should be aware that performance of ETFs over a period longer than one day can differ significantly from their stated daily performance objectives.
If you believe you were defrauded by your investment in an exchange-traded fund, it’s advisable to have an experienced attorney review your case for wrongdoing.
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