5. Leveraged ETF costs
The ETF’s expense ratio reflects the fund’s management costs and operating costs. It is a percentage of the NAV of the fund which is paid annually by the shareholders. The charge is paid throughout the year by daily adjusting the NAV. The expenditure ratio is considerably higher for leveraged funds than for standard ETFs.
Less than 0,1% is charged for most funds that track the S&P 500, whereas leveraged versions of the same fund charge around 1%. The higher rates reflect the cost of borrowing and the daily equilibrium of the Fund. Furthermore, the derivatives used to increase exposure may include other ‘hidden costs.’ These costs are not deducted from the NAV but may act as a drag on performance.