Series 7 practice questionhardPackaged Products — ETFs
An inverse ETF is designed to deliver -1x the daily return of its benchmark. If the S&P 500 falls 2% on Monday and rises 2% on Tuesday, the inverse ETF would approximately:
- AReturn to its original value
- BShow a slight loss due to daily compounding effects✓ Correct answer
- CShow a slight gain due to daily compounding effects
- DBe worth exactly 2% more than its original value
Explanation
Why B — Show a slight loss due to daily compounding effects
Daily inverse ETFs reset each day, so compounding matters. If the index starts at 100, falls 2% to 98, then rises 2% to 99.96, it ends slightly below where it started. A -1x daily inverse ETF would rise 2% to 102 on Monday, then fall 2% to 99.96 on Tuesday, also ending with a slight loss rather than returning exactly to 100.
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