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Leveraged ETFs

Leveraged Exchange Traded Funds

Leveraged exchange traded funds are a very new investment vehicle and most investors are only beginning to learn about them and calculate their potential. Many experts believe that they may be an extremely useful tool in reaching investment goals once they are utilized most effectively. Leveraged ETF's are structured to deliver much higher returns than would be delivered by simple holding of long and short positions.

These funds are traded on stock exchanges and they enable investors to profit from economies of scale through the disbursement of administrative and transaction fees to a large number of investors. Leveraged ETF's were first made available in 2006 after a lengthy SEC review. Leveraged ETF's are nearly identical to index funds, except that they combine borrowed capital with investor equity. This creates higher investment exposure. The ultimate goal of such a fund is to reach future appreciation of the investments that exceeds the cost of the initial capital.

ETF's fixed the problem of unpredictable pricing which was the major flaw of closed-end funds. The arbitrage created by open-end funds was very successful at keeping prices under control and close to or identical to net-asset-value. Previous types of ETF's had a downside tough- rising administrative costs. Leveraged ETF's took this burden off the shoulder of individual investors and made it more manageable by spreading it out among a greater number. The sharing of creation and redemption in leveraged ETF's is enabled through their ability to fine tune the amount of exposure to the underlying derivatives. This fine-tuning is accomplished by using derivatives.