Leveraged funds offer investors greater earning opportunities, but understanding their creation and goals is important. Time frames, access, sector, and amount of leverage are key considerations. Short and long position funds are available, but highly leveraged funds are riskier.
Many different types of leveraged funds offer greater earning opportunities for investors, based on changes in values in the stock market, currency markets, commodity markets or other parts of the financial community. Investors who can identify the various types of leveraged funds available may have a better chance of better diversifying their fund portfolios. This means understanding how leveraged funds are created and knowing some of the common goals in creating these financial instruments.
A big problem with leveraged funds is a time frame. Several leveraged fund opportunities are set up to deliver specific deliverables over a period of time, such as a day, month, or year. Investors can choose leveraged fund options that are built to “mature” over a time frame that matches their investment goals.
Different types of leveraged funds include mutual funds with leveraged instruments, as well as other funds called exchange-traded funds or ETFs, which are often easier to buy and sell. In addition, some index funds may also be leveraged, combining a strategy of pursuing stable earnings with maximizing the inherent volatility of the medium leveraged fund. Investors should think about the type of access they want for their fund trading activities.
Funds with a leveraged component are also available in various sectors. Investors can choose funds in energy, retail, agriculture, manufacturing or any other major sector to complement their overall investment strategy. Leverage is often a way that individual investors hope to maximize their returns on a specific “industry” or investment in something they think will increase significantly in the near future.
An important element to consider in funds with leveraged components is the actual amount of leverage included in the fund. Leverage means that the way the fund is set up magnifies any price gains or losses. For example, if a simple fund has a direct dollar correlation to an underlying stock or index, that fund will go up $1.00 when the underlying stock goes up $1.00. A fund that is “leveraged two to one” on the other hand, would go up $2.00. Likewise, losses would be magnified just like gains, which makes highly leveraged funds more dangerous than lightly leveraged ones.
Another important characteristic of some leveraged funds is whether they support a short or long position on stocks. In today’s complicated market, investors can usually find a way to buy funds that earn from a rise in stock or share price or a fall in price for the same underlying value. Funds that earn on price increases are called long position funds. Those that make money on price falls are called “short position” funds. While some experts point out that short positions are not a part of all markets, many different funds do represent short positions.
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