edwar77

Leveraged ETFs: A Value Destruction Trap?

One additional question: What is the perceived advantage of a 2X ETF vs buying or shorting the underlying index ETF (unlevergaed) on 50% margin? Example: Instead of buying a double short ETF (SDS) I short SPY on 50% margin. I still get double the daily return minus margin loan interest. Isn't this a cleaner way to achieve the desired result?

Leveraged ETFs: A Value Destruction Trap?

I appreciate your layout of the issue but I believe your example is incomplete as to the mechanics of rebalancing. Assuming that it's all done with shares and margin ( no derivatives) how then when the market falls do they fund the equity component of the additional share purchase? Example: Index has decreased by 10% that day and therefore the outstanding loan now exceeds 50% of fmv of portfolio. The fund needs to buy enough shares to bring the fmv back to par at beginning of the day. Wouldn't they have to fund those additional purchases with 100% equity to maintain a constant leverage ratio? Also how do they adjust for overall purchases and redmptions ( fund size) ?