What Are Leveraged ETFs?
- Exchange-Traded Funds (ETFs) are securities that contain a basket of stocks from an index such the S&P 500.
- Leveraging is an investing strategy that uses financial products and debt to increase the impact of pricing changes.
- A leveraged ETF (LETF), then, is a product that uses leveraging to magnify the pricing changes of its basket of stocks more than a non-leveraged, traditional ETF.
Where a given ETF would typically go up by 1% if its index goes up by 1%, a leveraged ETF might gain 2-3%. When the price drops by 1% the leveraged EFT will also drop at a magnified percentage. They are also often plagued by high management fees and transaction costs.
Leveraged ETFs carry far higher risk of losses than traditional investments. So much so that most experts do not advise them for the average investor, and even the SEC Division of Economic and Risk Analysis states:
“…investors may need a higher level of sophistication to understand the returns of LETFs over longer holding periods.”1
Have You Lost Money in Leveraged ETFs?
If you were invested in 2x or 3x Leveraged ETFs during the March 2020 Stock Market Downturn, you will have lost twice or three times as much as in traditional investments. If your broker or brokerage firm recommended Leveraged ETFs and did not carefully explain to you the extreme risk involved, then you may have a case against them.
Contact Us if you believe you were pressured into high-risk Leveraged ETFs and suffered significant losses because of them. We have extensive experience in evaluating and prosecuting cases for victims of stockbroker misconduct.
1. https://www.sec.gov/files/DERA_LETF_Economics_Note_Nov2019.pdf
