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.
See my recent articles in The USA Today and Nasdaq.
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