3. Standard ETFs vs Leveraged ETFs
ETFs are portfolios of securities that are themselves listed like ordinary shares. The vast majority of ETFs invest in a basket of securities to track the performance of an index. The basket is therefore structured to mirror the index. Leveraged ETFs are quite different, and don’t simply hold a portfolio of securities. To amplify returns, leveraged ETFs either use derivatives, or debt to increase the exposure to the index.
Using debt and derivatives introduces new costs and risks to the fund. Standard ETFs are predominantly passive investing vehicles. They make passive, long term investing accessible to investors with little investing knowledge or capital. Leveraged ETFs are a departure from this type of investing and are more suitable for active trading and hedging.