Justification of Levered ETFs?
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I have done some basic research on levered ETFs and cant understand them completely
How do you justify the existence of Levered ETFs when margin accounts are available? E.g. If I want 3X SPY returns, I can just deposit 1X in a margin account and lever the position to get 3X SPY.
I can justify the existence of these ETFs when the returns are 3X but the volatility is <3X, which is not always the case.
Could you guys give me a hand? ty.
options etf
asked Jan 17 at 12:41
TomDecimusTomDecimus
1068
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add a comment |
$begingroup$
I have done some basic research on levered ETFs and cant understand them completely
How do you justify the existence of Levered ETFs when margin accounts are available? E.g. If I want 3X SPY returns, I can just deposit 1X in a margin account and lever the position to get 3X SPY.
I can justify the existence of these ETFs when the returns are 3X but the volatility is <3X, which is not always the case.
Could you guys give me a hand? ty.
options etf
asked Jan 17 at 12:41
TomDecimusTomDecimus
1068
$endgroup$
add a comment |
$begingroup$
I have done some basic research on levered ETFs and cant understand them completely
How do you justify the existence of Levered ETFs when margin accounts are available? E.g. If I want 3X SPY returns, I can just deposit 1X in a margin account and lever the position to get 3X SPY.
I can justify the existence of these ETFs when the returns are 3X but the volatility is <3X, which is not always the case.
Could you guys give me a hand? ty.
options etf
asked Jan 17 at 12:41
TomDecimusTomDecimus
1068
$endgroup$
I have done some basic research on levered ETFs and cant understand them completely
How do you justify the existence of Levered ETFs when margin accounts are available? E.g. If I want 3X SPY returns, I can just deposit 1X in a margin account and lever the position to get 3X SPY.
I can justify the existence of these ETFs when the returns are 3X but the volatility is <3X, which is not always the case.
Could you guys give me a hand? ty.
options etf
options etf
asked Jan 17 at 12:41
TomDecimusTomDecimus
1068
asked Jan 17 at 12:41
TomDecimusTomDecimus
1068
asked Jan 17 at 12:41
TomDecimusTomDecimus
1068
asked Jan 17 at 12:41
TomDecimusTomDecimus
1068
asked Jan 17 at 12:41
TomDecimusTomDecimus
1068
1068
add a comment |
add a comment |
2 Answers
2
active
oldest
votes
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A margin loan and a levered ETF work differently.
Suppose you have 1000 cash in your account and you want to buy 2000 dollars of SPY. On margin, the loan will be -1000 and your equity will be 1000. Then your initial leverage will be 2:1. But if the value of your SPY goes to 2200 it will be -1000 loan, 1200 equity, 2200 market value, or a leverage of 2200:1200 = 1.83:1. If the value if SPY goes down the leverage will increase above 2. If you want you can modify these leverage numbers by adding/taking out cash, but it is up to you to manage the leverage over time.
With a levered ETF, the fund automatically adjusts the leverage to be 2:1 every day. It is a dynamic strategy, with some advantages and drawbacks.
Does that "justify" the existence of levered ETF's? I don't know. But they work differently.
answered Jan 17 at 14:39
Alex CAlex C
5,97611022
$endgroup$
$begingroup$
@TomDecimus as you can see mantaining a target leverage ratio is much simpler with a leveraged ETF than with a margin account, where you need to adjust daily your margin to keep the leverage ratio constant. Note that margin calls should normally bring the leverage ratio of a margin account back to its initial state.
$endgroup$
– Daneel Olivaw
Jan 17 at 17:00
$begingroup$
@DaneelOlivaw +Alex C Tyvm guys, seems to me using margin acc gives more flexibility on leverage level at the cost of constantly add/remove cash. Thanks for the clarification.
$endgroup$
– TomDecimus
Jan 17 at 17:18
add a comment |
$begingroup$
A partial answer could be legal or accounting reasons:
Legal reasons: Certain investors may not be allowed to buy outright derivatives or borrow large amounts of money.
Accounting reasons: Similarly, from an accounting perspective (e.g: financial ratios, capital requirements, covenants,…) there may be benefits in materializing an exposure through mutual funds instead of using derivatives or borrowed money.
answered Jan 17 at 14:23
setssets
607824
$endgroup$
add a comment |
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2 Answers
2
active
oldest
votes
2 Answers
2
active
oldest
votes
active
oldest
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active
oldest
votes
$begingroup$
A margin loan and a levered ETF work differently.
Suppose you have 1000 cash in your account and you want to buy 2000 dollars of SPY. On margin, the loan will be -1000 and your equity will be 1000. Then your initial leverage will be 2:1. But if the value of your SPY goes to 2200 it will be -1000 loan, 1200 equity, 2200 market value, or a leverage of 2200:1200 = 1.83:1. If the value if SPY goes down the leverage will increase above 2. If you want you can modify these leverage numbers by adding/taking out cash, but it is up to you to manage the leverage over time.
With a levered ETF, the fund automatically adjusts the leverage to be 2:1 every day. It is a dynamic strategy, with some advantages and drawbacks.
Does that "justify" the existence of levered ETF's? I don't know. But they work differently.
answered Jan 17 at 14:39
Alex CAlex C
5,97611022
$endgroup$
$begingroup$
@TomDecimus as you can see mantaining a target leverage ratio is much simpler with a leveraged ETF than with a margin account, where you need to adjust daily your margin to keep the leverage ratio constant. Note that margin calls should normally bring the leverage ratio of a margin account back to its initial state.
$endgroup$
– Daneel Olivaw
Jan 17 at 17:00
$begingroup$
@DaneelOlivaw +Alex C Tyvm guys, seems to me using margin acc gives more flexibility on leverage level at the cost of constantly add/remove cash. Thanks for the clarification.
$endgroup$
– TomDecimus
Jan 17 at 17:18
add a comment |
$begingroup$
A margin loan and a levered ETF work differently.
Suppose you have 1000 cash in your account and you want to buy 2000 dollars of SPY. On margin, the loan will be -1000 and your equity will be 1000. Then your initial leverage will be 2:1. But if the value of your SPY goes to 2200 it will be -1000 loan, 1200 equity, 2200 market value, or a leverage of 2200:1200 = 1.83:1. If the value if SPY goes down the leverage will increase above 2. If you want you can modify these leverage numbers by adding/taking out cash, but it is up to you to manage the leverage over time.
With a levered ETF, the fund automatically adjusts the leverage to be 2:1 every day. It is a dynamic strategy, with some advantages and drawbacks.
Does that "justify" the existence of levered ETF's? I don't know. But they work differently.
answered Jan 17 at 14:39
Alex CAlex C
5,97611022
$endgroup$
$begingroup$
@TomDecimus as you can see mantaining a target leverage ratio is much simpler with a leveraged ETF than with a margin account, where you need to adjust daily your margin to keep the leverage ratio constant. Note that margin calls should normally bring the leverage ratio of a margin account back to its initial state.
$endgroup$
– Daneel Olivaw
Jan 17 at 17:00
$begingroup$
@DaneelOlivaw +Alex C Tyvm guys, seems to me using margin acc gives more flexibility on leverage level at the cost of constantly add/remove cash. Thanks for the clarification.
$endgroup$
– TomDecimus
Jan 17 at 17:18
add a comment |
$begingroup$
A margin loan and a levered ETF work differently.
Suppose you have 1000 cash in your account and you want to buy 2000 dollars of SPY. On margin, the loan will be -1000 and your equity will be 1000. Then your initial leverage will be 2:1. But if the value of your SPY goes to 2200 it will be -1000 loan, 1200 equity, 2200 market value, or a leverage of 2200:1200 = 1.83:1. If the value if SPY goes down the leverage will increase above 2. If you want you can modify these leverage numbers by adding/taking out cash, but it is up to you to manage the leverage over time.
With a levered ETF, the fund automatically adjusts the leverage to be 2:1 every day. It is a dynamic strategy, with some advantages and drawbacks.
Does that "justify" the existence of levered ETF's? I don't know. But they work differently.
answered Jan 17 at 14:39
Alex CAlex C
5,97611022
$endgroup$
A margin loan and a levered ETF work differently.
Suppose you have 1000 cash in your account and you want to buy 2000 dollars of SPY. On margin, the loan will be -1000 and your equity will be 1000. Then your initial leverage will be 2:1. But if the value of your SPY goes to 2200 it will be -1000 loan, 1200 equity, 2200 market value, or a leverage of 2200:1200 = 1.83:1. If the value if SPY goes down the leverage will increase above 2. If you want you can modify these leverage numbers by adding/taking out cash, but it is up to you to manage the leverage over time.
With a levered ETF, the fund automatically adjusts the leverage to be 2:1 every day. It is a dynamic strategy, with some advantages and drawbacks.
Does that "justify" the existence of levered ETF's? I don't know. But they work differently.
answered Jan 17 at 14:39
Alex CAlex C
5,97611022
answered Jan 17 at 14:39
Alex CAlex C
5,97611022
answered Jan 17 at 14:39
Alex CAlex C
5,97611022
answered Jan 17 at 14:39
Alex CAlex C
5,97611022
5,97611022
$begingroup$
@TomDecimus as you can see mantaining a target leverage ratio is much simpler with a leveraged ETF than with a margin account, where you need to adjust daily your margin to keep the leverage ratio constant. Note that margin calls should normally bring the leverage ratio of a margin account back to its initial state.
$endgroup$
– Daneel Olivaw
Jan 17 at 17:00
$begingroup$
@DaneelOlivaw +Alex C Tyvm guys, seems to me using margin acc gives more flexibility on leverage level at the cost of constantly add/remove cash. Thanks for the clarification.
$endgroup$
– TomDecimus
Jan 17 at 17:18
add a comment |
$begingroup$
@TomDecimus as you can see mantaining a target leverage ratio is much simpler with a leveraged ETF than with a margin account, where you need to adjust daily your margin to keep the leverage ratio constant. Note that margin calls should normally bring the leverage ratio of a margin account back to its initial state.
$endgroup$
– Daneel Olivaw
Jan 17 at 17:00
$begingroup$
@DaneelOlivaw +Alex C Tyvm guys, seems to me using margin acc gives more flexibility on leverage level at the cost of constantly add/remove cash. Thanks for the clarification.
$endgroup$
– TomDecimus
Jan 17 at 17:18
$begingroup$
@TomDecimus as you can see mantaining a target leverage ratio is much simpler with a leveraged ETF than with a margin account, where you need to adjust daily your margin to keep the leverage ratio constant. Note that margin calls should normally bring the leverage ratio of a margin account back to its initial state.
$endgroup$
– Daneel Olivaw
Jan 17 at 17:00
$begingroup$
@TomDecimus as you can see mantaining a target leverage ratio is much simpler with a leveraged ETF than with a margin account, where you need to adjust daily your margin to keep the leverage ratio constant. Note that margin calls should normally bring the leverage ratio of a margin account back to its initial state.
$endgroup$
– Daneel Olivaw
Jan 17 at 17:00
$begingroup$
@DaneelOlivaw +Alex C Tyvm guys, seems to me using margin acc gives more flexibility on leverage level at the cost of constantly add/remove cash. Thanks for the clarification.
$endgroup$
– TomDecimus
Jan 17 at 17:18
$begingroup$
@DaneelOlivaw +Alex C Tyvm guys, seems to me using margin acc gives more flexibility on leverage level at the cost of constantly add/remove cash. Thanks for the clarification.
$endgroup$
– TomDecimus
Jan 17 at 17:18
add a comment |
$begingroup$
A partial answer could be legal or accounting reasons:
Legal reasons: Certain investors may not be allowed to buy outright derivatives or borrow large amounts of money.
Accounting reasons: Similarly, from an accounting perspective (e.g: financial ratios, capital requirements, covenants,…) there may be benefits in materializing an exposure through mutual funds instead of using derivatives or borrowed money.
answered Jan 17 at 14:23
setssets
607824
$endgroup$
add a comment |
$begingroup$
A partial answer could be legal or accounting reasons:
Legal reasons: Certain investors may not be allowed to buy outright derivatives or borrow large amounts of money.
Accounting reasons: Similarly, from an accounting perspective (e.g: financial ratios, capital requirements, covenants,…) there may be benefits in materializing an exposure through mutual funds instead of using derivatives or borrowed money.
answered Jan 17 at 14:23
setssets
607824
$endgroup$
add a comment |
$begingroup$
A partial answer could be legal or accounting reasons:
Legal reasons: Certain investors may not be allowed to buy outright derivatives or borrow large amounts of money.
Accounting reasons: Similarly, from an accounting perspective (e.g: financial ratios, capital requirements, covenants,…) there may be benefits in materializing an exposure through mutual funds instead of using derivatives or borrowed money.
answered Jan 17 at 14:23
setssets
607824
$endgroup$
A partial answer could be legal or accounting reasons:
Legal reasons: Certain investors may not be allowed to buy outright derivatives or borrow large amounts of money.
Accounting reasons: Similarly, from an accounting perspective (e.g: financial ratios, capital requirements, covenants,…) there may be benefits in materializing an exposure through mutual funds instead of using derivatives or borrowed money.
answered Jan 17 at 14:23
setssets
607824
answered Jan 17 at 14:23
setssets
607824
answered Jan 17 at 14:23
setssets
607824
answered Jan 17 at 14:23
setssets
607824
607824
add a comment |
add a comment |
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