Counter party risk on leveraged ETFs

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Sam Brazil
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Counter party risk on leveraged ETFs

Post by Sam Brazil » Wed Jan 07, 2015 10:32 pm

Was reading the other thread about 2x or 3x PPs using leveraged ETFs, and it got me wondering about the hidden counter party risk in leveraged ETFs.

I have no idea what's really behind these ETFs other than the vague notion that they use derivatives to target a leveraged return of the underlying, but what does that really mean? Is there a meltdown scenario in the future where these ETFs blow up?
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MachineGhost
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Re: Counter party risk on leveraged ETFs

Post by MachineGhost » Thu Jan 08, 2015 12:43 am

Sam Brazil wrote: Was reading the other thread about 2x or 3x PPs using leveraged ETFs, and it got me wondering about the hidden counter party risk in leveraged ETFs.

I have no idea what's really behind these ETFs other than the vague notion that they use derivatives to target a leveraged return of the underlying, but what does that really mean? Is there a meltdown scenario in the future where these ETFs blow up?
It means they use futures contracts.  But a "Tight Money" scenario would blow them up along with the PP.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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Gosso
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Re: Counter party risk on leveraged ETFs

Post by Gosso » Thu Jan 08, 2015 7:05 am

Many of Direxion's levered ETFs began trading in November 2008, and continued to perform as expected (3x the daily return) during the financial crisis.  So they have been battle-tested.
Last edited by Gosso on Thu Jan 08, 2015 8:25 am, edited 1 time in total.
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MachineGhost
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Re: Counter party risk on leveraged ETFs

Post by MachineGhost » Thu Jan 08, 2015 10:08 am

Gosso wrote: Many of Direxion's levered ETFs began trading in November 2008, and continued to perform as expected (3x the daily return) during the financial crisis.  So they have been battle-tested.
That's true.  A "Tight Money" scenario would imply only overleveraged or underwater ETF/ETN issuers blowing up, or index providers as in the case of Lehman Brothers.
Last edited by MachineGhost on Thu Jan 08, 2015 10:11 am, edited 1 time in total.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
Kbg
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Re: Counter party risk on leveraged ETFs

Post by Kbg » Fri Jan 09, 2015 7:38 pm

Maybe, but it isn't the etfs that would blow them up and particularly with run of the mill index based ones where the risk is easily offloaded. Gold, s&p 500 and treasuries...not going to be an issue short of Armageddon.
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