National Economic Research Associates has published an interesting guide to leveraged and inversed ETFs, which remain some of the most controversial financial products out there, especially on the retail side.
One of the interesting points it raises is the difference between using a leveraged ETF and your margin account. (via Research Recap)
The chart below demonstrates that actual leveraged ETF returns may yield returns closer to the desired degree of leverage from period to period than a margin account that ignores rebalancing.10 In this example, an investor who chose a strategy involving a simple margin account without rebalancing will experience returns in the second half of the period that are substantially less than twice the returns on the underlying index, while an investor who purchased an actual leveraged ETF will experience returns in both sub-periods that are close to twice the index return.
The simple margin account example ignores rebalancing, which means that as the market index experiences positive returns, the leverage ratio decreases, leading to returns that are less than twice the index returns in subsequent periods. A leveraged ETF, which typically rebalances daily, yields returns that are much more in line with the desired leverage ratio in future periods.
Though each account may be more or less advantageous than the other under various circumstances, the leveraged ETF approach of rebalancing daily is more consistent with the objectives of an investor who desires to maintain a specific degree of leverage while invested in the leveraged ETF.
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