CMFAS M8 Risks of Collective Investment Schemes question: a 2x leveraged ETF

CMFAS M8Risks of Collective Investment Schemes

Which statement about a 2x leveraged ETF is TRUE?

A Its leverage magnifies gains on up days but cushions losses on down days
B It targets twice the index's DAILY return, and daily resetting can make long-run returns diverge sharply from 2x
C It suits long-term buy-and-hold investors, since daily resets smooth out volatility over time
D It aims to return exactly twice the index's cumulative return over whatever holding period the investor chooses

Show the answer and explanation

Answer: B. It targets twice the index's DAILY return, and daily resetting can make long-run returns diverge sharply from 2x

Leveraged/inverse ETFs target a multiple of the index's DAILY return; because exposure is reset daily, compounding makes long-run returns diverge from the simple multiple, so they are short-term trading tools.

Common mistake

Assuming a 2x ETF delivers 2x over long periods, or that leverage magnifies only gains.

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CMFAS M8 Risks of Collective Investment Schemes question: a 2x leveraged ETF

Answer: B. It targets twice the index's DAILY return, and daily resetting can make long-run returns diverge sharply from 2x

Common mistake

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CMFAS M8 Risks of Collective Investment Schemes question: a 2x leveraged ETF

Answer: B. It targets twice the index's DAILY return, and daily resetting can make long-run returns diverge sharply from 2x

Common mistake

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