Leveraged Products
Another category of investments some investors turn to when looking to boost returns is leveraged products. Whether the investment vehicle is an ETF or a mutual fund, the approach is the same. Leveraged products seek to deliver multiples of a specified benchmark by increasing exposure to the benchmark through the use of derivatives. “Inverse” leveraged products seek to deliver the opposite performance of the index or benchmark they track. For example, a leveraged ETF might seek to return two times the daily return of the S&P 500 while an Inverse ETF would seek to return minus two times the return of the index. So, if the S&P 500 returned 2 percent on a given day, the leveraged ETF would return 4 percent and the Inverse ETF would return -4 percent.
An important and sometimes misunderstood aspect of leveraged products is that they often “reset" daily, meaning that they are designed to achieve their stated objectives on a daily basis. Their performance over longer periods of time—over weeks or months or years—can differ significantly from the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time. That said, there are other versions of these products that have monthly resets or no resets, but they can also be difficult to understand. For more information on leveraged and inverse ETFs see FINRA's Leveraged and Inversed ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors.
Other Products
There are many ways investors can chase return. The list of products described above is aimed at introducing you to a range of investments—from straight-forward to complex—that might be used for this purpose, but it is not an exhaustive list. For example, other investments that can be used to boost returns include preferred stock, private equity, funds of hedge funds and reverse exchangeable securities—and the list goes on. Regardless of what investments you are interested in, it is important that you take time to understand them and the risks involved.
