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A Skeptic on Leveraged ETFs

Nov 28, 2008 - 4:02 AM EST

David Merkel submits:

I am a skeptic on leveraged ETFs in one way. My view is that the more levered they get, the less likely they are to replicate the behavior of their index, however levered.

To get high amounts of leverage, they must rely on futures, options, swaps, and options on swaps, and the higher the amount of leverage they attempt to replicate, the greater the amount of slippage they will experience versus their multiplied index. There is also slippage from rolling futures from month to month.

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Source: Seeking Alpha (Nov 28, 2008 - 4:02 AM EST)