Many different types of leveraged funds offer more opportunities for investors to gain, based on changing values in the stock market, currency markets, commodities markets, or other parts of the financial community. Investors who can identify the various kinds of leveraged funds available may have more of a chance of better diversifying their fund portfolios. This means understanding how leveraged funds are created, and knowing about some of the common goals in setting up these financial instruments.
One big issue with leveraged funds is a time frame. Different leveraged fund opportunities are set up to provide specific end results relative to a period of time, such as a day, a month, or a year. Investors can choose the leveraged fund options that are built to “mature” on a time frame that matches their investment goals.
Different types of funds that are leveraged include mutual funds with leveraged instruments, as well as other funds called exchange traded funds, or ETFs, that are often easier to buy and sell. In addition, some index funds can also be leveraged, combining a strategy of pursuing stable gains with the inherent volatility magnification of the average leveraged fund. Investors should think about what kind of access they want for their fund trading activities.
Funds with a leveraged component are also available in different sectors. Investors can choose funds in energy, retail, agriculture, manufacturing, or any other major sector to complement their overall investment strategy. Leveraging sectors is often a way that single investors hope to maximize their yields relative to a specific “sector play” or investment in something that they think will rise significantly in the near future.
A major element to look at in funds with leveraged components is the actual amount of leverage included in the fund. Leveraging means that the way the fund is set up magnifies price gains or losses. For example, if a simple fund has a straight dollar correlation to an index or underlying equity, that fund would go up $1.00 when the underlying equity goes up $1.00. A fund that is “leveraged two to one” on the other hand, would go up $2.00. By the same token, losses would be magnified just like gains, which makes highly leveraged funds more dangerous than slightly leveraged ones.
Another important characteristic of some funds with leverage is whether they support a short or long position on equities. In today’s complicated market, investors can usually find a way to purchase funds that gain from either a stock or equity price rise, or a price fall for the same underlying value. The funds that gain based on price rises are called “long position” funds. Those that gain on price drops are called “short position” funds. Although some experts point out that short positions are not part of all markets, many different funds do effectively represent short positions.