ETFs can be divided into leveraged ETFs and reverse ETFs

According to the classification of whether to add leverage, ETFs can be divided into leveraged ETFs and reverse ETFs.
1. Leveraged ETF

A leveraged ETF can be understood as a leveraged ETF (Leveraged ETF), also known as a bullish or bullish ETF (Bull ETF), which refers to a transactional open-ended index fund that adds multiple leverage to an ordinary ETF to achieve a positive multiple of the target index's return on a daily basis (such as 1.5 times, 2 times, or even 3 times);

In other words, when the return on the target index changes by 1%, the change in the net value of the fund can reach the agreed 1.5%, 2%, or 3%. When the leverage ratio is 1 times, a leveraged ETF is actually equivalent to a traditional ETF.

For example, the 2x S&P 500 ETF (SSO) means: if the S&P 500 index rises 2%, then the S&P 500 ETF with 2x leverage will rise by 2x 2% = 4%. If the S&P 500 index falls 2%, then the 2x leveraged S&P 500 ETF will fall 4%.

An inverse ETF, also known as a short ETF or a bearish ETF (short ETF or bear ETF), is a transactional open index fund that uses leveraged investment tools such as stock index futures, swap contracts, etc., to track the return of the target index on a daily basis (such as -1 times, -2 times, or even -3 times); when the target index income changes by 1%, the change in the net value of the fund reaches the agreed value of -1%, -2%, or -3%.

Its role is to allow investors to short the stock market. The logic of an inverse ETF is simple. Assuming the S&P 500 index rises 5%, then the investment target of an inverted ETF should be a 5% drop. Conversely, if the S&P 500 falls 5%, then the reverse ETF would expect a 5% increase.

In the chart below, I have listed common leveraged ETFs and reverse ETFs for your reference:

(Source: Internal compilation, TQQQ Prospectus; data is for informational purposes only and does not represent any forecast or investment recommendation for future earnings)

Leveraged ETFs provide the possibility of significant returns over the target index, while inverted ETFs help investors hedge their portfolios. However, there are no free lunches in the world. These leveraged or inverse ETFs provide you with leverage, and at the same time, there will be corresponding losses, and management fees are more expensive than normal passive ETFs.

Investors need to pay particular attention to its product specifications and know each other before they can invest with confidence. Otherwise, they are likely to face the risk of liquidation in an extreme market environment.

Having said this, the knowledge of ETF classification comes to an end. After studying this lesson, have you noticed that there are a wide variety of ETFs. From indices to concepts, you can find ETFs that track them. It can be described as an ETF for everything! In the next course, by learning more ETF knowledge, I believe you will gradually master the characteristics and trading methods of these ETFs to make your investments more efficient!