Leveraged ETF Re-balancing - the Why and How - futures io
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Leveraged ETF Re-balancing - the Why and How

Speculators can predict Leveraged ETF flows into the futures market. Normal etf has 1 unit of underlying and moves 1 unit of price. Due to daily leverage- a leveraged ETF will have 2x the daily movement and will have to "reinvest" excess daily return for the next day on the close in order to be fully invested for the next day.


It is this re-balancing process that creates the potential for divergent results if leveraged funds are held for multiple trading sessions. Because long leveraged ETFs increase exposure after a gain and decrease exposure after a loss, a seesawing market can result in return erosion, since leveraged ETFs would effectively be increasing exposure ahead of a losing session and decreasing exposure ahead of a winning session.

Source: https://etfdb.com/leveraged-etfs/under-the-hood-of-leveraged-etfs/

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