Can a leveraged ETF's net assets suddenly go below zero?
Can a leveraged ETF's net assets suddenly go below zero?
Loading saved threads...
Flux · External communityPost link
External question — Personal Finance Stack Exchange
Author: Flux
Original post: https://money.stackexchange.com/questions/145031
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
Adaptation: HTML converted to plain text; contact email addresses removed.
When trading stocks on margin or when holding futures, sudden price movements may wipe out the posted margin. In some cases, the trader may even lose more than the posted margin (i.e. the trader owes money to his/her broker). Given that leveraged ETFs employ instruments that require the use of margin, is there a risk that adverse price movements could similarly wipe out all of the ETF's assets (and more)? This would result in the negative net assets. Is this possible?
Quote
Report
Bob Baerker · External communityPost link
External answer — Personal Finance Stack Exchange
Author: Bob Baerker
Original post: https://money.stackexchange.com/a/145033
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
Adaptation: HTML converted to plain text; contact email addresses removed.
For securities purchased on margin, the potential gain as well as the potential loss is increased. The higher the amount of borrowing (leverage), the greater the chance of the position's equity being wiped out and the less the amount of drop in the underlying assets that it takes to get there. A loss of 1/3 the value of a 3x ETF would wipe out the ETF's assets.
Quote
Report
Post Reply
Checking account access…