SIE practice questionhardLeveraged and Inverse ETFs
A 2x leveraged ETF seeks to provide:
- ATwice the dividend yield of its benchmark
- BTwice the annual return of its benchmark index
- CTwice the DAILY return of its benchmark index, which may differ significantly from 2x the longer-term return✓ Correct answer
- DA guaranteed 200% return over any time period
Explanation
Why C — Twice the DAILY return of its benchmark index, which may differ significantly from 2x the longer-term return
Leveraged ETFs seek to deliver a multiple (e.g., 2x or 3x) of the DAILY return of a benchmark. Due to daily compounding, the returns over periods longer than one day can deviate significantly from the expected multiple — especially in volatile markets. This 'volatility decay' makes leveraged ETFs unsuitable for long-term buy-and-hold investors. FINRA has issued guidance warning about these risks.
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