Financial advisors can properly utilize leveraged ETFs in client portfolios
Posted on: 08/25/2017
Financial advisors have varying views of the use of leveraged ETFs. These securities have the goal of providing (for 2x leveraged ETFs) double the daily return of the reference index.
An example of this can be found on the ProShares website: “ProShares Ultra Health Care seeks daily investment results, before fees and expenses, that correspond to two times (2x) the daily performance of the Dow Jones U.S. Health CareSM Index.”
It should be noted that iSectors’ Post-MPT Growth Allocation utilizes 2x and 3x leveraged ETFs to increase exposure to market sectors—the underlying quantitative model identifies this as being very attractive. Although not always owned in the portfolio, this strategy has had leveraged positions for approximately three-quarters of its 12 year history.
iSectors has found a long-term use for what was originally constructed to be a short-term instrument.
A leveraged ETF manager published research (2015) showing that leveraged ETFs are optimal for long-term holding periods. The research article, Should Leveraged ETFs be Held for Long Horizons?, discusses the following:
- Myths that regulators and compliance departments have created around leveraged ETFs.
- Leveraged ETF long-term expected return calculations.
- Methodology and results of determining optimally leveraged ETFs.
- Comparison of actual results to the expected.
We believe, in addition to Post-MPT Growth’s positive 12-year historical performance, this article provides theoretical evidence that the use of leveraged ETFs are appropriate and proper in some clients’ portfolios.*
*Past performance may not be indicative of future results.
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