Question

Why are the leveraged ETFs not an ideal long-term investment?

1 point

a. The fees of leveraged ETFs are negotiable compared to traditional ETFs

b. When an ETF drops 10% in value, it will require another more than 10% of return to recover to its original value

c. Only leveraged ETFs are subjected to higher long-term capital gain tax

d. All leveraged ETFs’ long-term return depends solely on the performance of the S&P500 index

Answer 1

CORRECT asnwer is B because, With a leveraged ETF, on top of the asset management fees, frictional expenses such as trading costs, and custody fees, you have the interest expense of the debt used to achieve the actual leverage. That means that every moment of every day, interest expense or its effective equivalent is reducing the value of the portfolio.So if ETF drop's 10% in value ,it will require another more than 10% of return to recover to its original value

Option A is not true as this is not the fees of leveraged and traditional ETF's are same

Option C is incorrect because both leveraged and regular ETF's are charged same long term capital gain tax

Option D is incorrect because ETF's does not solely depend on the performance of S&P index, there are lot more other factors also,