Leveraged funds offer opportunities for investors to earn based on changing values in financial markets, but investors must understand how they are created and the risks involved. Different types of leveraged funds are available, including mutual funds, ETFs, and index funds, and investors must consider the time frame, sector, amount of leverage, and whether the fund accepts a short or long position in equities.
Many different types of leveraged funds offer more opportunities for investors to earn, based on changing 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 be more likely to better diversify their fund portfolios. This means understanding how leveraged funds are created and knowing some of the common goals in setting up these financial instruments.
A big problem with leveraged funds is a time frame. Different leveraged fund opportunities are set to provide specific bottom line results relative to a period of time, such as one day, one month, or one year. Investors can choose leveraged fund options that are designed to “mature” in a time frame that matches their investment objectives.
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 can also be leveraged, combining a seek-for-steady-earning strategy with the inherent increase in volatility of the average leveraged fund. Investors need to think about what type of access they want for their fund trading activities.
Funds with a leveraged component are also available in different sectors. Investors can choose funds in energy, retail, agriculture, manufacturing or any other major sector to complement their overall investment strategy. Sector leverage is often a way that individual investors hope to maximize their returns relative to a specific “sector play” or investment in something that they believe 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 increases the price gains or losses. For example, if a single fund has a direct dollar correlation to an underlying index or equity, that fund would rise $1.00 when the underlying equity rises $1.00. A fund that is “leveraged two for one,” on the other hand, would go up $2.00. Similarly, losses would be magnified as would gains, making highly leveraged funds more dangerous than lightly leveraged ones.
Another important characteristic of some funds with leverage is whether they accept a short or long position in equities. In today’s complicated market, investors can usually find a way to buy funds that benefit from a stock or stock price rise, or price fall for the same underlying security. Funds that earn based on price increases are called “long position” funds. Those that profit from falling prices are called “short” funds. Although some experts point out that short positions are not part of all markets, many different funds do represent short positions.
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