CMFAS M8A Advanced ETFs question: seeks 2x the index's DAILY return

CMFAS M8AAdvanced ETFs

A leveraged ETF that seeks 2x the index's DAILY return is generally unsuitable as a long-term hold because:

A Daily compounding makes longer-period returns diverge, often unfavourably, from 2x
B It can be traded only at the end-of-day NAV, so it is unsuitable for trading
C Its fees are deducted only once a year, so costs build up unseen
D Its gearing is reset only once a year, so losses can exceed 100% of capital

Show the answer and explanation

Answer: A. Daily compounding makes longer-period returns diverge, often unfavourably, from 2x

Because exposure resets daily, the multi-day return of a 2x ETF is path-dependent and can differ markedly from twice the index's cumulative return - especially in choppy, volatile markets (volatility decay).

Common mistake

The daily objective does not compound to 2x over long periods; these are short-term/tactical tools.

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CMFAS M8A Advanced ETFs question: seeks 2x the index's DAILY return

Answer: A. Daily compounding makes longer-period returns diverge, often unfavourably, from 2x

Common mistake

Related CMFAS M8A questions

CMFAS M8A Advanced ETFs question: seeks 2x the index's DAILY return

Answer: A. Daily compounding makes longer-period returns diverge, often unfavourably, from 2x

Common mistake

Related CMFAS M8A questions