So how does a leveraged ETF use a rebalance mechanism to ensure that it does not liquidate?
The ETF has a rebalance mechanism. Normally, positions are rebalanced at 00:00:00 (UTC + 8) daily to ensure that the combined leverage ratio and the agreed ratio do not deviate too much. When there is a sharp fluctuation, if the target asset's fluctuation range exceeds a given threshold compared to the previous rebalance point (the threshold is initially set to 15% for 3 times long and short, the threshold may be different for other multiple products in the future) We will also perform temporary rebalancing to control the risk of the investment portfolio. The temporary rebalancing is only for the party that has lost money because of this fluctuation range, that is, if the BTC increase is 15%, we will rebalance the -3 times leveraged ETF and make no adjustments to other products. Please note that if the market trend continues after the irregular rebalancing is triggered, the user's loss will become smaller, but if the market trend reverses immediately after the trigger, the speed of the product's rebound will also be weakened by the rebalancing to lighten up. As mentioned earlier, if the daily leveraged ETF is profitable, the profit will be reinvested. If there is a loss, some of the positions sold will be restored to 3 times the leverage to avoid the risk of forced liquidation.
Take three times leveraged long on BTC as an example:
• If the 4-day trend of BTC is + 10%, + 10%, + 10%, + 10%, then the 4-day yield of the leveraged ETF is 185% (the calculation formula is 1.3 × 1.3 × 1.3 × 1.3 = 2.856) , 3 times higher than 44% of the 4th spot income;
• If the 4-day trend of BTC is -10%, -10%, -10%, -10%, the 4-day loss of the product is 76%, which is less than 3 times the 35% spot loss of 4 days;
• If the daily trend of BTC is + 10%, -10%, + 10%, -10%, then the 4-day yield of this product is -17%, which is underperforming the 4-day spot yield of -2% 3 Times. Therefore, when time spans a rebalancing cycle, a leveraged ETF does not guarantee a fixed multiple relationship between the cumulative return rate and the spot return rate over multiple days.
Generally speaking, under the trend market, the performance of leveraged ETF will be better than the declared leverage multiple (that is, the cumulative increase of ETF in the same direction will exceed 3 times the target rate of return, while the opposite direction ETF will decrease less than 3 times of the rate of return ), And the performance of leveraged ETFs in a volatile market will be worse than the stated leverage.
Disclaimer: Leveraged ETFs are emerging financial derivatives. The above does not constitute investment advice. Please pay attention to risk control. Leveraged ETFs greatly reduce the risk of strong liquidation, but in extreme conditions, there will be risks of approaching zeroing and liquidation. Please pay attention to the difference between net value and price to avoid suffering losses.