1
$\begingroup$

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.

Improve this question
$\endgroup$

2 Answers 2

Reset to default
3
$\begingroup$

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.

Improve this answer
$\endgroup$
2
  • $\begingroup$ @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, 2019 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, 2019 at 17:18
1
$\begingroup$

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.

Improve this answer
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.