Understanding Leveraged Emerging Markets ETFs and Their Risks

Leveraged emerging markets ETFs can be a powerful tool for investors looking to amplify their returns in a rapidly growing market. This type of ETF uses derivatives to increase the fund's exposure to the underlying asset.

These funds are designed to track an index, such as the MSCI Emerging Markets Index, which includes stocks from emerging markets like China, India, and Brazil. The MSCI Emerging Markets Index is a widely followed benchmark for emerging markets investments.

Investors should be aware that leveraged ETFs can be riskier than traditional ETFs, as they use debt to amplify their returns. This can lead to significant losses if the market moves against the fund.

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A leveraged ETF is a type of investment that uses financial derivatives and debt to amplify the returns of an underlying index or asset. It's like a supercharged version of a regular ETF, but with a higher risk of loss.

These funds aim to track the underlying index or asset with a 2:1 or 3:1 ratio, which means if the underlying index goes up by 1%, the leveraged ETF will go up by 2% or 3%. This can be a great way to make money if the market is trending in your favor, but it can also lead to significant losses if the market turns against you.

The leverage in leveraged ETFs comes from borrowing and using financial derivatives like futures contracts, forward contracts, total return swaps, and options. For example, if you invest $100 in an ETF that aims to have twice the return of the underlying asset, the fund might borrow $100 more to effectively double the investment.

Here are some common types of derivatives used in leveraged ETFs:

These derivatives can be used to generate returns through a method known as synthetic replication, which is generally more efficient than borrowing to buy the securities of the benchmark.

Leveraged ETFs use financial derivatives and debt to amplify the returns of an underlying index or other assets they track. This amplification can be a 2:1 or 3:1 ratio, depending on the fund.

The leverage in LETFs comes from borrowing and employing derivatives like futures contracts, forward contracts, total return swaps, and options. These derivatives allow LETFs to magnify the daily returns of the underlying index.

A 3x leveraged ETF, for example, attempts to increase an index's returns by 300% by maintaining a specific debt-to-equity ratio within the fund. This amplification can work in both directions, leading to magnified gains or losses.

Most LETFs track daily changes, resetting each day, but longer reset periods can be used. The extent of the gain depends on the amount of leverage used, and the risk of loss is far higher than that of traditional investments.

Here are the main sources of leverage in LETFs:

The management fees and transaction costs associated with LETFs can also diminish the fund's return, with an average expense ratio of 1.04% for LETFs in the U.S. markets.

Leveraged ETFs use financial products and debt to magnify each 1% gain in the underlying index, stock, or other tracked assets, resulting in a 2% or 3% gain.

The extent of the gain depends on the amount of leverage used, and the risk of loss is far higher than that of traditional investments. Investors should be aware of the risks of LETFs.

These funds have higher fees than non-leveraged ETFs because premiums, fees, and interest need to be paid on the derivatives and for margin costs.

The average expense ratio for LETFs in the U.S. markets is 1.04%, according to ETF.com.

Most LETFs aim to track daily changes, resetting each day, but longer reset periods, such as one month, can be used.

The leverage in LETFs comes from several sources, including borrowing and derivatives like futures contracts, forward contracts, total return swaps, and options.

Investors can make money when the market is declining using inverse LETFs, which attempt to use their leverage to make money when the underlying index is declining in value.

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However, LETFs can lead to significant losses that exceed the tracked index or assets, making them a high-risk investment.

Here are some key costs associated with LETFs:

Despite the higher expense ratios, LETFs can be less expensive than other forms of margin, such as short selling or using margin to buy stock.

Leveraged ETFs are a type of investment that can amplify your returns, but they also come with increased risk. They work by using derivatives, such as futures contracts, forward contracts, total return swaps, and options, to magnify the exposure to a particular index or asset.

These derivatives allow LETFs to reset daily, which means they can track daily changes in the target asset. However, some LETFs can have longer reset periods, such as one month. This can be beneficial for investors who want to take advantage of market trends over a longer period.

The leverage in LETFs comes from several sources, including borrowing and the use of derivatives. For example, a fund that aims to have twice the return of the targeted assets might take your invested funds and then borrow the same amount to effectively double how much is invested.

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Here are some common derivatives used in LETFs:

Investors should be aware that LETFs can lead to significant losses that exceed the tracked index or assets. They also have higher fees and expense ratios compared with traditional ETFs. Additionally, LETFs are not long-term investments and should be used with caution.

It's essential to understand that LETFs are not suitable for all investors. They require a high level of risk tolerance and a good understanding of the underlying market trends. Investors should also be aware of the potential for significant losses and the importance of setting a stop-loss order to limit their exposure.

The fees associated with a leveraged emerging markets ETF can be complex, but it's essential to understand them before investing. The management fee is 0.72% as of the current prospectus.

The expense ratio, which includes management fees, other operating expenses, and Acquired Fund Fees and Expenses, is 1.20% (gross) and 1.18% (net) as of the current prospectus. This means that if you invest $10,000, you'll pay $120 (gross) or $118 (net) in fees per year.

The Net Expense Ratio would be 0.95% if Acquired Fund Fees and Expenses were excluded. However, the fund's adviser has agreed to waive all or a portion of its management fee and/or reimburse the fund for other expenses through September 1, 2025, to the extent that the fund's total annual fund operating expenses exceed 0.95% of the fund's average daily net assets.

Here's a breakdown of the fees:

Keep in mind that the fund's performance may be subject to substantial short-term changes due to ongoing market volatility.

Fees can add up quickly when investing in Leveraged ETFs (LETFs). They have higher fees than non-leveraged ETFs because premiums, fees, and interest need to be paid on the derivatives and for margin costs.

Most LETFs have expense ratios of 1% or more, which is significantly higher than the expense ratio of 0.72% for some LETFs. This expense ratio includes management fees, acquired fund fees and expenses, and other expenses.

The management fee alone can be 0.72%, as shown in a prospectus. This fee is just one of the costs associated with LETFs.

The costs of leverage can be substantial, and it's essential to consider these fees when deciding whether to invest in LETFs. Trading on margin, for example, can involve fees of 3% or more on the amount borrowed.

Here's a breakdown of the fees for one LETF:

These fees can add up quickly, so it's essential to carefully review the prospectus and understand the costs associated with LETFs.

The pricing and performance of a fund can be a bit tricky to understand, but let's break it down.

NAV (Net Asset Value) and Market Price information as of 01/13/2025 shows that the fund has experienced significant fluctuations in its value. The 1-month return is -5.27% for XXCHNAV and -4.88% for XXCHMarket Close. These numbers can be alarming, but it's essential to look at the bigger picture.

The 1-year return is not available for XXCHNAV and XXCHMarket Close, but the 3-year and 5-year returns are also not provided. This is because the fund is relatively new, with an inception date of 02/07/2024.

The expense ratio is an important factor to consider. The Net Expense Ratio for both funds is 1.18%, which includes management fees, other operating expenses, and Acquired Fund Fees and Expenses. If these Acquired Fund Fees and Expenses were excluded, the Net Expense Ratio would be 0.95%. This is thanks to an Operating Expense Limitation Agreement between the fund's adviser, Rafferty Asset Management, LLC, and the fund.

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Here's a table summarizing the key performance metrics:

Keep in mind that short-term performance is not a reliable indicator of a fund's future performance. It's essential to consider the fund's overall performance and fees before making an investment decision.

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Distributions are a crucial aspect of understanding fees and performance in investments. The record date, ex-date, and payable date are the key dates to keep track of, as they determine when distributions are made.

The record date is the date by which you must own the investment to receive the distribution. This date is usually specified in the investment's prospectus or by the investment company.

The ex-date, which usually occurs one business day after the record date, is the last day you can buy the investment and still receive the upcoming distribution. After the ex-date, the investment price will drop to reflect the impending distribution.

The payable date is the date when the distribution is actually paid out to investors. This date is usually a few weeks after the ex-date.

Distributions can include income, short-term capital gains, long-term capital gains, and return of capital. The total distribution is the sum of these components, which can vary from one investment to another.

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The Premium/Discount section of an ETF's performance report can be a bit confusing, but it's actually quite straightforward. The numbers represent how much the ETF's price has deviated from its net asset value (NAV).

The total return and market price columns show the ETF's performance over different time periods, but the premium/discount can make it seem like the ETF has performed better or worse than its benchmark. However, this discrepancy may be due to the use of systematic fair value.

Here are some specific numbers to look at:

As you can see, the total return and market price columns have some differences, but the premium/discount is relatively small. This suggests that the ETF's price is not significantly deviating from its NAV.