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Counter party risk on leveraged ETFs
Posted: Wed Jan 07, 2015 10:32 pm
by Sam Brazil
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?
Re: Counter party risk on leveraged ETFs
Posted: Thu Jan 08, 2015 12:43 am
by MachineGhost
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.
Re: Counter party risk on leveraged ETFs
Posted: Thu Jan 08, 2015 7:05 am
by Gosso
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.
Re: Counter party risk on leveraged ETFs
Posted: Thu Jan 08, 2015 10:08 am
by MachineGhost
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.
Re: Counter party risk on leveraged ETFs
Posted: Fri Jan 09, 2015 7:38 pm
by Kbg
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.