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When trading stocks on margin or when holding futures, sudden price movements may wipe out the posted margin. In some cases, the trader may even lose more than the posted margin (i.e. the trader owes money to his/her broker). Given that leveraged ETFs employ instruments that require the use of margin, is there a risk that adverse price movements could similarly wipe out all of the ETF's assets (and more)? This would result in the negative net assets. Is this possible?

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For securities purchased on margin, the potential gain as well as the potential loss is increased. The higher the amount of borrowing (leverage), the greater the chance of the position's equity being wiped out and the less the amount of drop in the underlying assets that it takes to get there. A loss of 1/3 the value of a 3x ETF would wipe out the ETF's assets.

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    To be clear, if the underlying assets of a 3X leveraged ETF gap (i.e. no chance to trade) down 34%, the EFT will be wiped out, correct? Whether they'll list a negative price, I doubt. Commented Sep 19, 2021 at 12:10
  • JTP - Yes, that is correct. I rewrote the answer because I went off on a tangent about an individual buying on margin. Commented Sep 19, 2021 at 14:31
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    No problem. I think the implied question was whether the holder of such an ETF could possibly owe money if the value goes negative and it shuts down. My gut says it would be the sponsor of the ETF that is liable for that amount. Commented Sep 19, 2021 at 14:33
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    I didn't infer that as the question. But to address that, the owner of the leveraged ETF would not have any responsibility for negative assets because he owns the security outright. He has no excess risk unless he bought the leveraged ETF on margin. And FWIW, FINRA sets the maintenance requirement for leveraged ETFs as 25% multiplied by the amount of leverage used (brokers can require more), not to exceed 100% of the value of the ETF. So the maintenance requirement for a 3x leveraged long ETF would be 75%. Commented Sep 19, 2021 at 14:44
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    The question is whether the ETF's value can go BELOW zero. Who loses? Commented Sep 21, 2021 at 9:34

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