How do 3x ETFs work? Where does the value come from? Stocks? Futures? What allows them to be 3x value?

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Answer 1 · 2017-02-05 06:10:19

John C Brandy, Financial Consultant (Hourly)

@brandyjc • 02/05/17 This answer was first published on 02/05/17. For the most current information about a financial product, you should always check and confirm accuracy with the offering financial institution. Editorial and user-generated content is not provided, reviewed or endorsed by any company.

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The value is a promise by the company backing that particular investment that if the market goes up by "x", your investment will go up by "3x". This is allowed because the reverse is also true. If the market goes down by "x", your investment goes down by "3x".

These are very risky, but in proper small proportion can be a good idea.

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Answer 2 · 2017-02-14 17:26:52

see this user

Adam C. Harding, Financial Advisor

@AdamClarkHarding • 02/14/17 This answer was first published on 02/14/17. For the most current information about a financial product, you should always check and confirm accuracy with the offering financial institution. Editorial and user-generated content is not provided, reviewed or endorsed by any company.

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ETFs like these are constructed with options; this allows for fairly accurate tracking of the desired exposure (like 3x bull or bear, for example), but only in the short term.

As you may be aware, options have something called "decay" which essentially refers to the fact that an option's value typically is diminished over time as it nears expiration. Because of this decay, as well as the implementation costs and management fees associated with these products, you may notice that the longer term relationship between a leveraged ETF and the underlying index may not be mathematically sound. As a simple example, try to find the performance of a 2x or 3x S&P 500 ETF in 2016 and compare it to the S&P 500 returns; the return of the leveraged ETF will almost certainly not be exactly 2 or 3x, but likely something smaller.

In any event, I basically never recommend these types of investment vehicles as they represent a gamble rather than a sound investment approach.

Of course, if I can clarify any of the above or offer any guidance, please feel free to reach out.

Adam C. Harding, CFP

For informational purposes only, not to be considered investment, tax, or legal advice.

www.adamclarkharding.com

See my recent articles in The USA Today and Nasdaq.

How do 3x ETFs work? Where does the value come from? Stocks? Futures? What allows them to be 3x value?

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