Leveraged Bond

Leveraged bond mutual funds and ETFs seek to achieve a multiple of... Leveraged bond mutual funds and ETFs seek to achieve a multiple of the short-term returns of a fixed-income index. For example, a 2x leveraged long U.S. Treasury mutual fund or ETF will aim to return twice the daily return of U.S. Treasury bonds of a specified duration. It’s important to note that given how often these funds are rebalanced, the effects of compounding mean that they will only achieve their targeted return on a day-to-day basis. For instance, a fund that seeks twice the daily return of 10-year U.S. Treasury bonds will almost certainly not achieve twice the monthly return of these fixed income securities. Over time, leveraged bond mutual funds and ETFs typically decay given the rebalancing process. As such, they should only be held by experienced traders on a very short-term basis. Leveraged bond mutual funds and ETFs differ from most traditional fixed-income mutual funds and ETFs because they use derivatives to magnify their exposure to a particular security. These derivatives are typically bilateral (so-called over the counter) agreements with banks that allow the ETF or mutual fund provider to achieve the desired degree of leverage and exposure for their fund. The use of over-the-counter derivatives introduces what is known as counterparty risk: In the event that the bank cannot fulfill its obligations, the mutual fund or ETF in question may be unable to deliver its targeted daily returns to investors. Given their short-term and risky nature, leveraged bond products are not appropriate for long-term, conservative-minded investors, who should instead look to acquire traditional (aka unleveraged) fixed income products. Last Updated: 12/08/2023 View more View less

Leveraged bond mutual funds and ETFs seek to achieve a multiple of the short-term returns of a fixed-income index. For example, a 2x leveraged long U.S. Treasury mutual fund or ETF will aim... Leveraged bond mutual funds and ETFs seek to achieve a multiple of the short-term returns of a fixed-income index. For example, a 2x leveraged long U.S. Treasury mutual fund or ETF will aim to return twice the daily return of U.S. Treasury bonds of a specified duration. It’s important to note that given how often these funds are rebalanced, the effects of compounding mean that they will only achieve their targeted return on a day-to-day basis. For instance, a fund that seeks twice the daily return of 10-year U.S. Treasury bonds will almost certainly not achieve twice the monthly return of these fixed income securities. Over time, leveraged bond mutual funds and ETFs typically decay given the rebalancing process. As such, they should only be held by experienced traders on a very short-term basis. Leveraged bond mutual funds and ETFs differ from most traditional fixed-income mutual funds and ETFs because they use derivatives to magnify their exposure to a particular security. These derivatives are typically bilateral (so-called over the counter) agreements with banks that allow the ETF or mutual fund provider to achieve the desired degree of leverage and exposure for their fund. The use of over-the-counter derivatives introduces what is known as counterparty risk: In the event that the bank cannot fulfill its obligations, the mutual fund or ETF in question may be unable to deliver its targeted daily returns to investors. Given their short-term and risky nature, leveraged bond products are not appropriate for long-term, conservative-minded investors, who should instead look to acquire traditional (aka unleveraged) fixed income products. Last Updated: 12/08/2023 View more View less