What is the difference between leveraged ETF, Futures Contract and Spot Leverage?
What they have in common:
Similar to futures contract products, leveraged ETF products are derivatives with leverage. It can amplify the returns of investors and become an inexpensive risk hedging tool.
But compared to futures contracts, leveraged ETF products have the following unique features:
No margin, no need to keep track, no need to worry
Leveraged ETFs are as simple as spot transactions, require no margin, loan repayments, or pegs, and for investors who don't have much time to pegs, buying leveraged ETF products can save you a lot of energy.
Fixed leverage multiples to achieve the perfect balance of returns and risks
For futures holders, as asset prices change, the leverage of contract positions may change, which deviates from the original intention of investors. For example, investors have established a low leveraged short futures position. When the asset price rises sharply, the investor's position leverage will become high, which deviates from the investor's original risk appetite. The leveraged ETF product leverage ratio is basically constant, which allows investors to better comply with their investment plans and achieve the perfect balance of returns and risks.
No short positions, lower rates
Compared with leveraged spot trading, leveraged ETF products have a unique rebalancing mechanism without the risk of being liquidated. At the same time, the holding rate of leveraged ETF products is lower than the interest expense of leveraged spot transactions.
[Case]: I am a futures investment expert. Compared with the three-fold leveraged futures that I directly open, is the return of this three-fold leveraged ETF the same? In the short-term or small changes, the two are basically the same, but the long-term is very different. For example, if Bitcoin increases by 3 times all the way, and you directly open a 3 times leveraged futures to go long, you will get 9 times the return. The three times leveraged BTC3L ETF will have a return of about 17 times because of the use of the compounding mechanism of position adjustment. Conversely, if Bitcoin falls by 50%, the result of a triple leverage is a liquidation of the position and the account is reset to zero. The BTC3L ETF will adjust the position and risk pre-control in a timely manner according to market conditions through a rebalance mechanism to ensure that the position will not be outdated and There is still some principal remaining.
Thought: So what is the mechanism of readjusting positions and compounding interest and rebalancing? This is the unique advantage of ETF, to be further elaborated below…
What are the advantages of a leveraged ETF?
- Instant transaction, No need for margin, Easy to operate
On BiKi, account users can trade Leveraged ETF the same way they trade spot derivatives, without the use of margin. Take the 3 times long leverage for BTC (BTC 3L) for example, all the account user has to do is to enter his/her desired price to trade the BTC 3L, and the rest will follow exactly the same as trading spot derivatives.
2. Compounding Interest Effect
The leveraged ETF will automatically transfer the position gain to the principal, that is, if the user's leveraged ETF generates a floating profit (there is no floating profit before rebalancing), then the next rebalancing, the floating profit will make the leveraged ETF position Increase, that is to add 3 times the position of floating profit, making the income form a compound interest pattern.
3. Rebalancing mechanism controls risk and fears market fluctuations
The leveraged ETF has its own risk control mechanism. In the case of market fluctuations, it can adjust the position to achieve a risk balance, and avoid extreme positions in extreme market conditions.
【Take for example】:
If the user is 3 times long BTC contract, then BTC falls by 33%, then the user's position will no doubt be closed, leaving nothing. However, if a user buys a leveraged ETF—BTC 3x bullish (BTC 3L), the leveraged ETF will fall according to market conditions and adjust the position through a rebalance mechanism to prevent the user's position from being closed. Even if the BTC price falls by 33%, the user, the position still has assets remaining.
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.