3.4.1. Non-Traditional ETFs
ETFs, as just described, are called traditional ETFs. They can be contrasted with riskier non-traditional ETFs. Two types of non-traditional ETFs are leveraged ETFs and inverse ETFs.
Leveraged ETFs use derivative products such as equity futures, equity options, and equity swaps to try to deliver daily returns of two to three times above the returns of the index they are tracking. For example, a triple-leveraged ETF, often seen with the descriptor 3x, is one that projects returns three times the tracked index. For example, if you invested in a 3x leveraged ETF, and the index rose 2% in a day, you would expect to see returns of 6% at the end of that day.
Some types of leveraged ETFs try to short the market, meaning they try to deliver the opposite of the market of an index. These are called inverse ETFs or short ETFs or bear ETFs. Inverse ETFs use similar derivative products as leveraged ETFs to profit from the decline in an index of underlying assets. Like traditional ETFs, they track many kinds of indexes. Inverse ETFs are often marketed as a way to profit from or hedge the risk of a declining market. For example, Let’s pretend we have purchased an inverse ETF that is set up to short the S&P 500 index. When the S&P 500 goes down by 2%, your gain would be 2%. If you had a 3x shares inverse ETF, your gain would be 6%.
Both of these inverse and leveraged ETFs are complex and carry significant risks. Most leveraged and inverse ETFs reset daily, meaning they are set up to achieve their return on a daily ba