Justification of Levered ETFs?












1












$begingroup$


I have done some basic research on levered ETFs and cant understand them completely



How do you justify the existence of Levered ETFs when margin accounts are available? E.g. If I want 3X SPY returns, I can just deposit 1X in a margin account and lever the position to get 3X SPY.



I can justify the existence of these ETFs when the returns are 3X but the volatility is <3X, which is not always the case.



Could you guys give me a hand? ty.






options etf







share|improve this question









$endgroup$

















    1












    $begingroup$


    I have done some basic research on levered ETFs and cant understand them completely



    How do you justify the existence of Levered ETFs when margin accounts are available? E.g. If I want 3X SPY returns, I can just deposit 1X in a margin account and lever the position to get 3X SPY.



    I can justify the existence of these ETFs when the returns are 3X but the volatility is <3X, which is not always the case.



    Could you guys give me a hand? ty.






    options etf







    share|improve this question









    $endgroup$















      1












      1








      1





      $begingroup$


      I have done some basic research on levered ETFs and cant understand them completely



      How do you justify the existence of Levered ETFs when margin accounts are available? E.g. If I want 3X SPY returns, I can just deposit 1X in a margin account and lever the position to get 3X SPY.



      I can justify the existence of these ETFs when the returns are 3X but the volatility is <3X, which is not always the case.



      Could you guys give me a hand? ty.






      options etf







      share|improve this question









      $endgroup$




      I have done some basic research on levered ETFs and cant understand them completely



      How do you justify the existence of Levered ETFs when margin accounts are available? E.g. If I want 3X SPY returns, I can just deposit 1X in a margin account and lever the position to get 3X SPY.



      I can justify the existence of these ETFs when the returns are 3X but the volatility is <3X, which is not always the case.



      Could you guys give me a hand? ty.






      options etf




      options etf






      share|improve this question













      share|improve this question











      share|improve this question




      share|improve this question










      asked 4 hours ago









      TomDecimusTomDecimus

      1068




      1068






















          2 Answers
          2






          active

          oldest

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          3












          $begingroup$

          A margin loan and a levered ETF work differently.



          Suppose you have 1000 cash in your account and you want to buy 2000 dollars of SPY. On margin, the loan will be -1000 and your equity will be 1000. Then your initial leverage will be 2:1. But if the value of your SPY goes to 2200 it will be -1000 loan, 1200 equity, 2200 market value, or a leverage of 2200:1200 = 1.83:1. If the value if SPY goes down the leverage will increase above 2. If you want you can modify these leverage numbers by adding/taking out cash, but it is up to you to manage the leverage over time.



          With a levered ETF, the fund automatically adjusts the leverage to be 2:1 every day. It is a dynamic strategy, with some advantages and drawbacks.



          Does that "justify" the existence of levered ETF's? I don't know. But they work differently.






          share|improve this answer









          $endgroup$













          • $begingroup$
            @TomDecimus as you can see mantaining a target leverage ratio is much simpler with a leveraged ETF than with a margin account, where you need to adjust daily your margin to keep the leverage ratio constant. Note that margin calls should normally bring the leverage ratio of a margin account back to its initial state.
            $endgroup$
            – Daneel Olivaw
            28 mins ago










          • $begingroup$
            @DaneelOlivaw +Alex C Tyvm guys, seems to me using margin acc gives more flexibility on leverage level at the cost of constantly add/remove cash. Thanks for the clarification.
            $endgroup$
            – TomDecimus
            10 mins ago



















          1












          $begingroup$

          A partial answer could be legal or accounting reasons:




          • Legal reasons: Certain investors may not be allowed to buy outright derivatives or borrow large amounts of money.


          • Accounting reasons: Similarly, from an accounting perspective (e.g: financial ratios, capital requirements, covenants,…) there may be benefits in materializing an exposure through mutual funds instead of using derivatives or borrowed money.







          share|improve this answer









          $endgroup$













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            2 Answers
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            2 Answers
            2






            active

            oldest

            votes









            active

            oldest

            votes






            active

            oldest

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            3












            $begingroup$

            A margin loan and a levered ETF work differently.



            Suppose you have 1000 cash in your account and you want to buy 2000 dollars of SPY. On margin, the loan will be -1000 and your equity will be 1000. Then your initial leverage will be 2:1. But if the value of your SPY goes to 2200 it will be -1000 loan, 1200 equity, 2200 market value, or a leverage of 2200:1200 = 1.83:1. If the value if SPY goes down the leverage will increase above 2. If you want you can modify these leverage numbers by adding/taking out cash, but it is up to you to manage the leverage over time.



            With a levered ETF, the fund automatically adjusts the leverage to be 2:1 every day. It is a dynamic strategy, with some advantages and drawbacks.



            Does that "justify" the existence of levered ETF's? I don't know. But they work differently.






            share|improve this answer









            $endgroup$













            • $begingroup$
              @TomDecimus as you can see mantaining a target leverage ratio is much simpler with a leveraged ETF than with a margin account, where you need to adjust daily your margin to keep the leverage ratio constant. Note that margin calls should normally bring the leverage ratio of a margin account back to its initial state.
              $endgroup$
              – Daneel Olivaw
              28 mins ago










            • $begingroup$
              @DaneelOlivaw +Alex C Tyvm guys, seems to me using margin acc gives more flexibility on leverage level at the cost of constantly add/remove cash. Thanks for the clarification.
              $endgroup$
              – TomDecimus
              10 mins ago
















            3












            $begingroup$

            A margin loan and a levered ETF work differently.



            Suppose you have 1000 cash in your account and you want to buy 2000 dollars of SPY. On margin, the loan will be -1000 and your equity will be 1000. Then your initial leverage will be 2:1. But if the value of your SPY goes to 2200 it will be -1000 loan, 1200 equity, 2200 market value, or a leverage of 2200:1200 = 1.83:1. If the value if SPY goes down the leverage will increase above 2. If you want you can modify these leverage numbers by adding/taking out cash, but it is up to you to manage the leverage over time.



            With a levered ETF, the fund automatically adjusts the leverage to be 2:1 every day. It is a dynamic strategy, with some advantages and drawbacks.



            Does that "justify" the existence of levered ETF's? I don't know. But they work differently.






            share|improve this answer









            $endgroup$













            • $begingroup$
              @TomDecimus as you can see mantaining a target leverage ratio is much simpler with a leveraged ETF than with a margin account, where you need to adjust daily your margin to keep the leverage ratio constant. Note that margin calls should normally bring the leverage ratio of a margin account back to its initial state.
              $endgroup$
              – Daneel Olivaw
              28 mins ago










            • $begingroup$
              @DaneelOlivaw +Alex C Tyvm guys, seems to me using margin acc gives more flexibility on leverage level at the cost of constantly add/remove cash. Thanks for the clarification.
              $endgroup$
              – TomDecimus
              10 mins ago














            3












            3








            3





            $begingroup$

            A margin loan and a levered ETF work differently.



            Suppose you have 1000 cash in your account and you want to buy 2000 dollars of SPY. On margin, the loan will be -1000 and your equity will be 1000. Then your initial leverage will be 2:1. But if the value of your SPY goes to 2200 it will be -1000 loan, 1200 equity, 2200 market value, or a leverage of 2200:1200 = 1.83:1. If the value if SPY goes down the leverage will increase above 2. If you want you can modify these leverage numbers by adding/taking out cash, but it is up to you to manage the leverage over time.



            With a levered ETF, the fund automatically adjusts the leverage to be 2:1 every day. It is a dynamic strategy, with some advantages and drawbacks.



            Does that "justify" the existence of levered ETF's? I don't know. But they work differently.






            share|improve this answer









            $endgroup$



            A margin loan and a levered ETF work differently.



            Suppose you have 1000 cash in your account and you want to buy 2000 dollars of SPY. On margin, the loan will be -1000 and your equity will be 1000. Then your initial leverage will be 2:1. But if the value of your SPY goes to 2200 it will be -1000 loan, 1200 equity, 2200 market value, or a leverage of 2200:1200 = 1.83:1. If the value if SPY goes down the leverage will increase above 2. If you want you can modify these leverage numbers by adding/taking out cash, but it is up to you to manage the leverage over time.



            With a levered ETF, the fund automatically adjusts the leverage to be 2:1 every day. It is a dynamic strategy, with some advantages and drawbacks.



            Does that "justify" the existence of levered ETF's? I don't know. But they work differently.







            share|improve this answer












            share|improve this answer



            share|improve this answer










            answered 2 hours ago









            Alex CAlex C

            5,86111022




            5,86111022












            • $begingroup$
              @TomDecimus as you can see mantaining a target leverage ratio is much simpler with a leveraged ETF than with a margin account, where you need to adjust daily your margin to keep the leverage ratio constant. Note that margin calls should normally bring the leverage ratio of a margin account back to its initial state.
              $endgroup$
              – Daneel Olivaw
              28 mins ago










            • $begingroup$
              @DaneelOlivaw +Alex C Tyvm guys, seems to me using margin acc gives more flexibility on leverage level at the cost of constantly add/remove cash. Thanks for the clarification.
              $endgroup$
              – TomDecimus
              10 mins ago


















            • $begingroup$
              @TomDecimus as you can see mantaining a target leverage ratio is much simpler with a leveraged ETF than with a margin account, where you need to adjust daily your margin to keep the leverage ratio constant. Note that margin calls should normally bring the leverage ratio of a margin account back to its initial state.
              $endgroup$
              – Daneel Olivaw
              28 mins ago










            • $begingroup$
              @DaneelOlivaw +Alex C Tyvm guys, seems to me using margin acc gives more flexibility on leverage level at the cost of constantly add/remove cash. Thanks for the clarification.
              $endgroup$
              – TomDecimus
              10 mins ago
















            $begingroup$
            @TomDecimus as you can see mantaining a target leverage ratio is much simpler with a leveraged ETF than with a margin account, where you need to adjust daily your margin to keep the leverage ratio constant. Note that margin calls should normally bring the leverage ratio of a margin account back to its initial state.
            $endgroup$
            – Daneel Olivaw
            28 mins ago




            $begingroup$
            @TomDecimus as you can see mantaining a target leverage ratio is much simpler with a leveraged ETF than with a margin account, where you need to adjust daily your margin to keep the leverage ratio constant. Note that margin calls should normally bring the leverage ratio of a margin account back to its initial state.
            $endgroup$
            – Daneel Olivaw
            28 mins ago












            $begingroup$
            @DaneelOlivaw +Alex C Tyvm guys, seems to me using margin acc gives more flexibility on leverage level at the cost of constantly add/remove cash. Thanks for the clarification.
            $endgroup$
            – TomDecimus
            10 mins ago




            $begingroup$
            @DaneelOlivaw +Alex C Tyvm guys, seems to me using margin acc gives more flexibility on leverage level at the cost of constantly add/remove cash. Thanks for the clarification.
            $endgroup$
            – TomDecimus
            10 mins ago











            1












            $begingroup$

            A partial answer could be legal or accounting reasons:




            • Legal reasons: Certain investors may not be allowed to buy outright derivatives or borrow large amounts of money.


            • Accounting reasons: Similarly, from an accounting perspective (e.g: financial ratios, capital requirements, covenants,…) there may be benefits in materializing an exposure through mutual funds instead of using derivatives or borrowed money.







            share|improve this answer









            $endgroup$


















              1












              $begingroup$

              A partial answer could be legal or accounting reasons:




              • Legal reasons: Certain investors may not be allowed to buy outright derivatives or borrow large amounts of money.


              • Accounting reasons: Similarly, from an accounting perspective (e.g: financial ratios, capital requirements, covenants,…) there may be benefits in materializing an exposure through mutual funds instead of using derivatives or borrowed money.







              share|improve this answer









              $endgroup$
















                1












                1








                1





                $begingroup$

                A partial answer could be legal or accounting reasons:




                • Legal reasons: Certain investors may not be allowed to buy outright derivatives or borrow large amounts of money.


                • Accounting reasons: Similarly, from an accounting perspective (e.g: financial ratios, capital requirements, covenants,…) there may be benefits in materializing an exposure through mutual funds instead of using derivatives or borrowed money.







                share|improve this answer









                $endgroup$



                A partial answer could be legal or accounting reasons:




                • Legal reasons: Certain investors may not be allowed to buy outright derivatives or borrow large amounts of money.


                • Accounting reasons: Similarly, from an accounting perspective (e.g: financial ratios, capital requirements, covenants,…) there may be benefits in materializing an exposure through mutual funds instead of using derivatives or borrowed money.








                share|improve this answer












                share|improve this answer



                share|improve this answer










                answered 3 hours ago









                setssets

                600724




                600724






























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