In the finance world, “leverage” is a technique that amplifies an investor’s profits or losses. Therefore, a leveraged ETF means the fund aims to provide amplified returns of the daily performance of the index.
So if the market index rises by 1% on a given day, then a 2x leveraged ETF should rise by 2% on that day. However, if the index falls by 1% on that day, the 2x Leveraged ETF would go down by 2%.
*All percentage returns reflected are for illustration purposes only, and are before fees and expenses calculations. They do not represent actual results.
The word “inverse” simply means the “opposite”. Thus, in this case, inverse ETF means the fund aims to provide return or performance that is the opposite of the daily performance of the index.
So if the index drops by 1% on a given day, then a 1x inverse ETF should rise by 1% on that day. Conversely, if the index is up by 1%, then the 1x Inverse ETF would decline by 1% on that day.
*All percentage returns reflected are for illustration purposes only, and are before fees and expenses calculations. They do not represent actual results.
L&I products allow investors to gain profit in either bull or bear markets.
Investors can enjoy leverage without being provided any margin (Leveraged ETF).
Leverage effect means less capital at risk (Leverage ETF).
Investors can hedge or take opportunities during a bear market (Inverse ETF).
Characteristic | ETF | Leveraged ETF | Inverse ETF |
Investment objective | Replicates / tracks the performance of the index | Seeks to provide daily returns equivalent to a multiple of the index return | Seeks to provide daily returns to the opposite of the index return |
Use of leverage | No, leverage factor is not applicable | Yes, leverage factor capped at two times (2x) in Malaysia | Currently, no, as the leverage factor is capped at one time (1x) in Malaysia |
Rebalancing frequency | Quarterly or semi-annual, depending on index methodology | Daily | Daily |
Target investors | General investors | Qualified investors (you need to meet one of the qualifying criteria) | Qualified investors (you need to meet one of the qualifying criteria) |
Holding period suitability | Long term | Short term | Short term |
Both Leveraged ETF and Inverse ETF usually use a combination of debt and financial derivatives to replicate the daily magnified returns or daily inverse returns of their index.
With the aim being to achieve investment results that usually target the daily returns of the index, most of the Leveraged and Inverse ETFs are structured to rebalance their investment strategies on a daily basis in order to maintain a target leverage ratio.
This means Leveraged and Inverse ETFs are more appropriate for short-term strategies rather than buy-and-hold investments.
For further information on leveraged and inverse ETF, you may wish to access the websites of the issuers as follows:-
As L&I ETFs work differently compared to the typical ETFs or stocks, only investors who fall under one of these criteria can trade L&I ETFs:
A would-be investor needs to submit a declaration to the Participating Organisation / broker on whether they meet any one of the above criteria prior to trading in L&I ETFs.
On top of the above, an investor also needs to accept the risk disclosure statement provided by the broker.