ETF is the short form of an exchange-traded fund. This is nothing but a type of mutual fund which is bundled as shares and is traded as if it is stock. This thus makes it possible to trade on the ETF all through the day like you would trade any stock on the secondary market.
The other common term that you will come across when reading on ETF’s is the leveraged ETF. It is important to know what is it and how it is different from an ETF.
The leveraged ETF is a fund that makes use of the financial derivatives and debt in order to increase the return on the index that is underlying. The fund tries to keep a constant leverage amount during the complete time frame of investment which is mostly either 2: 1 or 3
Since the time the market has been in place, there have been people who have speculated and have made a prediction of what the direction of a particular security will be in the future. They win if their speculation stands correct. This means the speculator used to buy the stock on a margin. This is the concept behind leveraged ETF. Leveraged ETF is when the movement is amplified using the borrowed money and the movement of the underlying asset is intensified either negatively or positively.
The leverage ETF on Crypto VIP Club is reset each day and thus if you thought that you can just buy and hold a leveraged ETF position then you would soon see that the value has come down to zero. This is even if the market had been very bullish.
Beginners should not start trading in leveraged ETFs’ so soon
There is a lot of temptation to try to trade the leveraged ETFs but one should know that it finds no place in any long-term portfolio. So do not let your advisor put it in your portfolio and nor should you buy it if you want to create along term portfolio. The payoff is also not that great as the leveraged ETF’s also attract investment management fees.
Who should make use of it
The leveraged ETFs are used by those traders who would like to do some speculation in the index or to make sure of any short-term momentum. The risk and the costs are very high and thus it is not suited for any long-term investment. The trader would be holding on to a leveraged ETF for just a few days.
The main reason for using the leveraged ETF to trade is that it is comparatively less expensive than other forms of trading where you need margins. Like in short selling where you borrow the shares from your broker, you speculate that the stock will move downwards. Using margins in order to buy stocks also becomes expensive and thus could also lead to margin calls if you are losing money on your position. You also have to pay interest on the margin amount.
The leveraged ETF are mostly used to hedge in order to protect a short position