Rebalancing Act: A Primer On Leveraged and Inverse ETFs

Article by By Raymund Wong, CFA, CPA, ABV and Kara Hargadon*

Overview

A leveraged exchange-traded fund (ETF) is a financial instrument that seeks to deliver a daily return¹ that is a multiple of the return of an underlying index, while an inverse ETF seeks to deliver a daily return equal to the opposite of the return of an underlying index. For example, a 2x leveraged ETF may seek to deliver double the daily returns of the S&P 500 Index, while an inverse ETF may seek to deliver the opposite of the daily returns of the S&P 500 Index. An ETF may be both leveraged and inverse, meaning that it seeks to deliver daily returns that are a multiple of the opposite of the underlying index's daily return.