Deutsche Bank’s exchange traded fund platform has launched a range of seven leveraged ETFS.
Three of the ETFs track daily leveraged short indices that provide two times daily inverse, or opposite, exposure to the DAX, Eurostoxx 50 and S&P 500 indices. The others track daily leveraged long indices that provide two times daily long exposure to the Dax, Eurostoxx 50, FTSE 100 and S&P 500 indices.
Because the starting point for each daily leveraged long index is reset daily, the returns of each ETF will not simply be twice the returns of the corresponding long index or be twice the inverse returns of the corresponding long index for periods longer than one day.
For example, if an index and its daily leveraged long counterpart are both at 100 points on day one and the long index rises by 10 per cent to 110 points per cent on day two, the daily leveraged long index would rise by 20 per cent to 120 points. If, on day three, the long index then falls by 5 per cent, its 110 points would be reduced to 104.
At the same time, the leveraged long index would have fallen by double that of the long index – 10 per cent. This would see a fall from 120 points to 108 points.
The ETFS are designed for sophisticated investors who want to take advantage of daily movements on a leveraged and/or inverse basis. They could be useful a short-term trading strategy, not a buy and hold investment, but it is important to monitor them daily. This is because leverage will magnify small market movements, which could lead to bigger losses than the corresponding long index just as they could also lead to higher gains.