CMFAS M8 Risks of Collective Investment Schemes question: volatile multi-week period a 2x leveraged ETF returns noticeably

CMFAS M8Risks of Collective Investment Schemes

Over a volatile multi-week period a 2x leveraged ETF returns noticeably LESS than twice its index's cumulative return. The primary cause is:

A The index being rebalanced to new constituents during the period
B The fund holding the index shares physically rather than via swaps
C A swap counterparty defaulting on the payments owed to the fund
D Daily resetting of exposure, so compounding makes returns diverge from 2x

Show the answer and explanation

Answer: D. Daily resetting of exposure, so compounding makes returns diverge from 2x

Leveraged ETFs aim to deliver a multiple of the index's DAILY return; because exposure resets daily, compounding over longer, volatile periods makes the cumulative return diverge sharply from the simple multiple.

Common mistake

Blaming fees or counterparty default rather than daily-reset compounding for the divergence.

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CMFAS M8 Risks of Collective Investment Schemes question: volatile multi-week period a 2x leveraged ETF returns noticeably

Answer: D. Daily resetting of exposure, so compounding makes returns diverge from 2x

Common mistake

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CMFAS M8 Risks of Collective Investment Schemes question: volatile multi-week period a 2x leveraged ETF returns noticeably

Answer: D. Daily resetting of exposure, so compounding makes returns diverge from 2x

Common mistake

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