What happens to the price of the triple-leveraged ETF if the S&P 500 loses more than one-third of its value (i.e., the return is below -33 1/3%)?
Does it mean the value is equal to zero?
Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It only takes a minute to sign up.Sign up to join this community
Theoretically, yes, if the S&P 500 dropped 33% in a single day, a 3x S&P 500 leveraged ETF would be worthless.
To understand leveraged ETFs, think of them as a margin buy. This isn't exactly how they are structured, but it is similar.
When you invest $1000 into a 3x ETF, an additional $2000 is essentially borrowed on your behalf and invested as well. If the index goes up 10%, the investment in the ETF goes up from $3000 to $3300. When you sell and the loan is paid off, your $1000 earned $300, or 30%.
If the index drops by 33%, the $3000 investment in the ETF goes down to $2000. When the $2000 loan is paid off, there is nothing left.
As the other answers have explained, there are a couple of things in place that would prevent this big of a loss happening in one day. Circuit breakers at the exchange would halt trading for the day, and there may be safeguards in place in the policies of the ETF that would liquidate the assets before they become worthless.
Leveraged ETFs have expenses built into them (such as margin interest), guaranteeing that you will never truly reach 3x any gain of the index, and will usually see a little more than 3x any loss.
It would depend on daily holdings of the ETF/ETN. While ETF such as SPXL aims to replicate 3X intraday returns, they use futures, swaps, and options. They are not required to guarantee exactly 3X returns. Currently, SPXL uses Swaps and SPY. So it would depend on the margin call policy, and the details of the swap agreements. One possible outcome is that the SPY would be liquidated before the net asset of ETF goes near 0, and the max loss of the swap agreement is limited to the net assets (just an example). If S&P 500 falls by 33% in a day, there would be massive premium/discount on the ETF price. Trading of that ETF may also be suspended. If such apocalyptic scenario happens, money would be the last thing to worry about.
It would not be 0, it would be down 33%.
Note for this to happen we would see a theoretical drop in the market by 10% which would trigger a 'circuit breaker.'
Current circuit breakers are at 7%,13%, and 20% drops in a day. The first two would result in a 15 minute halt in trading, the 20% drop halts trading for the day.
After the 15 minutes it is quite possible the etf continues to drop. There is indeed a tracking error on these do the the leverage component as well as the management fee.