have an account?【sign in】Leveraged Low Volatility ETFs:Harnessing the Power of Leverage in Low Volatility Investing
cristauthorLow volatility investing has become increasingly popular among investors seeking to mitigate risk and improve long-term returns. Low volatility strategies focus on selecting stocks with low historical volatility, which typically correlate less with the broader market. However, investors often seek additional leverage to enhance their returns. In this article, we explore the concept of leveraged low volatility exchange-traded funds (ETFs) and how they can help investors achieve their investment objectives.
What are Leveraged Low Volatility ETFs?
Leveraged low volatility ETFs are investment vehicles that seek to deliver two to three times the volatility-based returns of their underlying index. These funds use leverage to capture the potential benefits of low volatility investing, while also offering investors the opportunity to gain exposure to a broader range of securities.
How do Leveraged Low Volatility ETFs Work?
Leveraged low volatility ETFs work by using derivatives, such as equity swaps and stock index futures, to create a position that is two to three times the volatility of the underlying index. This means that if the index rises 1%, the fund would typically rise 2% to 3%. Conversely, if the index falls 1%, the fund would typically fall 2% to 3%.
The use of leverage in leveraged low volatility ETFs can be a double-edged sword. While it can increase returns, it also increases the risk of loss. As a result, investors should carefully assess the risk-reward profile of these funds and consider their appropriate use in a well-diversified portfolio.
Benefits of Leveraged Low Volatility ETFs
1. Exposure to Low Volatility Securities: Leveraged low volatility ETFs can provide investors with exposure to a broader range of securities with low volatility characteristics, allowing them to capitalize on the potential benefits of this investment style.
2. Enhanced Returns: By leveraging the returns of the underlying index, leveraged low volatility ETFs can potentially deliver higher returns than their unlevered counterparts.
3. Diversification: Investing in leveraged low volatility ETFs can provide additional diversification to a portfolio, helping to mitigate risk and improve long-term performance.
4. Flexibility: Leveraged low volatility ETFs can be used in a variety of investment strategies, including portfolio weighting, margin borrowing, and tax-advantaged accounts.
Challenges and Considerations
1. Leverage Risk: As mentioned earlier, leveraging can increase returns but also increases the risk of loss. Investors should carefully assess the risk-reward profile of leveraged low volatility ETFs and ensure they are appropriate for their investment objectives and risk tolerance.
2. Price Volatility: As with any investment, price volatility can be an issue for leveraged low volatility ETFs. Investors should be aware of potential price movements and consider using stop-loss orders to manage potential losses.
3. Tracking Error: Leveraged funds typically experience higher tracking error compared to their unlevered counterparts. Investors should be aware of potential differences in performance between the fund and its underlying index and consider using other metrics, such as Sharpe ratio, to evaluate fund performance.
4. Tax Considerations: Leveraged ETFs can have significant tax implications, particularly for investors in tax-advantaged accounts. Investors should carefully consider the potential tax implications of their investment strategy and seek professional tax advice as needed.
Leveraged low volatility ETFs can be a powerful tool for investors seeking to harness the benefits of low volatility investing while also seeking additional leverage. However, investors should carefully assess the risk-reward profile of these funds and consider their appropriate use in a well-diversified portfolio. By doing so, investors can harness the power of leverage in low volatility investing and potentially improve their long-term investment performance.