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?
Counter party risk on leveraged ETFs
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Re: Counter party risk on leveraged ETFs
It means they use futures contracts. But a "Tight Money" scenario would blow them up along with the PP.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?
"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!
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!
Re: Counter party risk on leveraged ETFs
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.
- MachineGhost
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Re: Counter party risk on leveraged ETFs
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.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.
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!
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!
Re: Counter party risk on leveraged ETFs
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.