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Leveraged ETF Rebalancing: It's Not As Bad As It Seems

Benzinga.com
0 Comments| October 6, 2015

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A frequent criticism of leveraged exchange-traded funds is that these ETFs can, in volatile market environments, deviate wildly from their stated objectives.

The scenario, one that has been brought up countless times since leveraged ETFs garnered increased attention during the global financial crisis, has recently been spotted. For example, the Direxion Daily S&P Biotech Bear 3X Shares (NYSE: LABD) recently delivered returns well in excess of triple the daily inverse performance of the S&P Biotechnology Select Industry Index when measured over multiple weeks during the recent biotech calamity.

Of course, there are a litany of examples of leveraged ETFs, both bull and bear funds, underperforming their stated objectives, leaving a sour taste in traders' mouths. On this front, a frequent critique of leveraged ETFs has been the ill effects of daily rebalancing.

Leveraged ETFs: Short-Term Trading Vehicles

There are several reasons leveraged ETFs are always as advertised as short-term trading vehicles and one of the prime reasons is daily rebalancing. Leveraged ETFs invest in derivatives to attain leverage and those derivatives require daily rebalancing to bring the ETF in line with the index it is attempting to track.

Daily rebalancing of leveraged ETFs has also been highlighted as contributing factor in end-of-day market volatility. ...

/www.benzinga.com/trading-ideas/long-ideas/15/10/5889218/leveraged-etf-rebalancing-its-not-as-bad-as-it-seems alt=Leveraged ETF Rebalancing: It's Not As Bad As It Seems>Full story available on Benzinga.com

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