When a leveraged ETF is purchased during the trading day, an investor may or may not receive the full amount of exposure to an index that the leveraged ETF is striving to return (whether that is 2x, -2x, etc.).
That’s because during the trading day the value of the underlying index changes and the ETF’s price also changes. The ETF cannot adjust its exposure to the index during the trading day.
The exposure of a leveraged ETF is only set once a day at the end of the trading day. Therefore an investor may purchase the ETF during the trading day at a point where it has either more or less exposure to the index than an investor intended. Since the exposure of the ETF is reset to the target exposure (2x or -2x) before the next trading day, this phenomenon only applies to an investor on the day the ETF is purchased.
Here is a hypothetical example of what may happen during the trading day to an ETF with a goal of 2X exposure to an index:
Trade Order Time
Index
NAV* example
IIV**
example
Actual
Exposure%
Exposure
Movement
Prior Day’s Closing NAV
1,000.00
$100.00
NA
200%
NA
10:00 a.m. buy
1,050.00
NA
$110.00
190%
Decreased
3:00 p.m. buy
950.00
NA
$90.00
210%
Increased
Closing NAV
1,020.00
$104.00
NA
NA
NA
Next Business Day: 10:00 a.m.
1,040.00
NA
$108.00
200%
Target
NA = Not Applicable
*Net Asset Value (NAV) is the value of a fund’s investments calculated once a day, at the end of each trading day when the market closes. The NAV remains the same until the end of the next trading day. The NAV is calculated by taking the total assets, deducting the liabilities, and dividing by the total number of shares outstanding.
**Intraday Indicative Value (IIV) approximates the ETF’s net asset value, published every 15 seconds throughout the trading day so investors always know the
approximate value of the ETF. The indicative value does not reflect the value at which the ETF share can be created or redeemed—the NAV reflects this. The IIV is based on the last sale prices of securities specified for creation or redemption, plus any estimated cash amounts associated with the creation unit. Each ETF has its own ticker for the Intraday Indicative Value.
This piece is intended to be for information purposes only. Investors should discuss these concepts and their personal financial situation with their financial advisor or advisors prior to making any investment decisions.
Inverse funds and leveraged funds may not be suitable for all investors. Investing in short/inverse funds involves certain risks, which may include increased volatility due to the funds' possible use of short sales of securities and derivatives such as options and futures. The funds are subject to active trading risks that may increase volatility and impact the funds' ability to achieve their investment objectives. The use of leverage by a mutual fund increases the risk to the fund. The more a mutual fund invests in leveraged instruments, the more the leverage will magnify any gains or losses on those investments.
For more complete information regarding Rydex funds, call 800.820.0888 or click here for a prospectus. Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. The fund's prospectus contains this and other information about the fund. Read the prospectus carefully before you invest or send money.
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