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.


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.

  • $\begingroup$ @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. $\endgroup$ Jan 17 '19 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 '19 at 17:18

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.


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