%0 Journal Article %A Kristoph J Rollenhagen %T Pitfalls and Potential: An Attempt to Demystify Leveraged & Inverse Exchange-Traded Index Funds %D 2009 %J ETFs and Indexing %P 105-107 %V 2009 %N 1 %X The objective of this article is to simplify (but not oversimplify) and clarify some of the mathematical intricacies and nuances of the leveraged and inverse exchange-traded index funds. A plethora of such funds have come to market in the past couple of years, and their numbers continue to expand. According to a recent Bloomberg report, there are more than 115 leveraged ETFs with approximately $31 billion in assets under management. The three largest players dominating this niche are PowerShares, Direxion, and Rydex. This article was conceived based on the author’s knowledge of the use of leveraged and inverse ETFs, but without full knowledge of the workings of these types of funds (compounding, in particular). Needless to say, initial and ongoing education is critical. The author believes that with the proper understanding, risk tolerance, and investment objectives, leveraged and inverse ETFs may be profitable, albeit very short-term, vehicles. Armed with the understanding that in a trending and non-volatile period (with the direction of the trend having been chosen correctly), a total return from a leveraged or inverse ETF may be higher than the totals of the individual daily returns. Conversely, this prior concept goes out the window in a market characterized by volatility, where, just as easily (and sometimes more quickly), total returns from individual days’ returns might likely be more attractive than the cumulative return of the ETF over the same period. But, the author believes, this is the exception rather than the rule. These vehicles are designed based on a single day’s performance, and only investors sophisticated enough to fully understand their operation should transact in them. %U https://guides.pm-research.com/content/iijetfind/2009/1/105.full.pdf