Last Updated October 25, 2022
Exchange Traded Funds (ETFs)
Exchange-traded funds (“ETFs”) are securities that generally track a basket of other securities, without requiring
that investors purchase those securities individually. ETF shares are bought and sold on an exchange. Among other
things, ETFs combine features that are similar to stocks and mutual funds. For instance, like individual stocks, ETF
shares are traded throughout the day at prices on the exchange that change based on market forces. Like mutual fund
shares, ETF shares represent partial ownership of a portfolio that is assembled by professional managers.
There are a number of different types of ETFs, each with a different investment focus. ETFs can, for example, track
widely followed stock market benchmarks, specific stocks, market sectors, or subsets of broader indices. Other ETFs
are actively managed portfolio investments, which may include a variety of different types of securities that may
change over time.
ETFs are subject to risks that are like those of other diversified investments. Investing in ETFs involves a variety of
different risks, including, but not limited to, market risks and the possible loss of principal, liquidity risks, costs, and
risks that the ETF will close and liquidate. Although ETFs are designed to provide investment results that generally
correspond to the performance of their respective underlying benchmarks or indices, they may not be able to
replicate exactly that performance because of expenses and other factors. ETFs are required to distribute portfolio
gains to shareholders at year-end, which may be generated by portfolio rebalancing or the need to meet
diversification requirements. ETF trading may also have tax consequences.
Certain types of ETFs may not be appropriate for all investors. An ETF’s prospectus describes its unique investment
objectives, risks, charges, expenses, and other important information. Investors should read and carefully consider
all the information in an ETF’s prospectus before investing in that or any other ETF.
LEVERAGED AND INVERSE ETFs
Leveraged and inverse ETFs use financial debt to amplify the returns of an underlying stock, index, or other
benchmark. These funds seek to deliver positive or negative multiples of the performance of the underlying index or
benchmark they track. They are complex investments that come with a unique set of risks and are not appropriate for
most retail investors. Potential risks include resetting daily, lack of predictable performance, fees, and tax
consequences. Leveraged and Inverse ETFs are complex investments that come with a unique set of risks and may
be unsuitable for retail investors.
Leveraged and Inverse ETFs differ from other types of index funds because rather than simply tracking an index,
they attempt to provide either a positive or negative multiple of an index’s performance over a specified time—
usually just one day (although some may offer monthly or quarterly exposure). For example, a leveraged ETF may
offer returns equivalent to 1.5x, 2x, or even 3x the performance of an index during a single day. If the index rose
2%, a 2x leveraged ETF would aim for a 4% return (if it fell, the loss would also be magnified by 2x). Inverse ETFs,
on the other hand, deliver multiples in the opposite direction, so if the index rose 2%, a 2x inverse ETF would
generate a negative 4% return. These funds use a variety of complex strategies and are not designed to be held
longer than the reset periods stated in their prospectuses. That means a fund that aims for a daily multiple should not
be held for longer than a single day.
In addition, some ETFs may be linked to single stocks rather than an index or benchmark. These single-stock
leveraged or inverse ETFs peg their returns to the stock performance of single companies, including some of the
most volatile growth stocks, with inverse ETFs delivering the opposite or multiple of the opposite of the stock gain
or loss and leveraged ETFs delivering a multiple of the gain or loss on a given day.
Important considerations for Leveraged and Inverse ETFs:
● Short term: Leveraged and inverse ETFs are generally used for short term trading. Most of these products
are designed to achieve a daily leveraged or inverse objective on a daily basis and reset each day. There is a
compounding effect associated with the daily resets which makes the performance unpredictable if the
product is held longer than one day.
● Risk and Lack of Predicted Performance: These securities perform differently than other products. They
have the propensity to be more volatile and are inherently riskier than their non-leveraged, non-inverse
counterparts. There is always a risk that not every leveraged or inverse ETF will meet its stated objective
on any given trading day. The closure rate of these products is significantly higher than non-leveraged or
non-inverse product.
● Fees: Leveraged or inverse ETFs may be more costly than traditional ETFs due to constant rebalancing of
their holdings.
● Tax Consequences: Daily resets can cause these products to realize significant short-term capital gains
that may not be offset by a loss. There may be additional tax-related issues, so it is important to check with
your tax advisor about the consequences of investing in these products.
As with all products, DriveWealth reserves the rights to, without notice, remove leveraged or inverse ETFs from the
platform or designate them liquidate-only due to the volatile and unpredictable nature of these products.
Additional information about the risks associated with leveraged and inverse ETFs is available from the SEC at:
https://www.sec.gov/investor/pubs/leveragedetfs-alert.htm and from FINRA at:
https://www.finra.org/investors/insights/lowdown-leveraged-and-inverse-exchange-traded-products.
