What market conditions are leveraged ETF products for?
Leveraged ETF products have advantages in one-sided markets. There are more frictional expenses in two-sided markets. Let's take BTC3L as an example to observe the profitability of leveraged ETF products under different market conditions:*3xBTC refers to conventional 3-time leveraged BTC_USDT perpetual futures
l One-sided market: one way up
In the "one way up" scenario, leveraged ETF products perform better than conventional 3-time leveraged perpetual futures (3xBTC). Below is how the profit is calculated: On the first day, the price for one BTC rises from $200 to $210, the fluctuation rate is +5%. The NAV (net asset value) of BTC3L becomes $200(1+5%× 3)=$230; On the second day, the price for one BTC rises from $210 to $220, the fluctuation rate is +4.76%. The NAV of BTC3L becomes $230× (1+4.76%× 3)=$262.84; In conclusion, the fluctuation rate in these 2 days is ($262.84 - $200)/$200×100% = 31.4%, which is greater than 30%.
l One-sided market: one way down
In the "one way
down" scenario, the loss incurred from trading leveraged ETF products is less than from futures trading.
Below is how the loss is calculated: The price of BTC
falls by 5% on the first day. The NAV of BTC3L becomes: $200 (1-5%×3)=$170; The price falls
again on the second day and the fluctuation rate is -5.26%. The NAV of BTC3L becomes $170
(1-5.26%×3)=$143.17; The overall
fluctuation rate in these 2 days is ($143.17 - $200)/ $200×100%= -28.4%, which is greater than -30%.
l Two-sided market: first up, then down
If the price of BTC first rises, then falls back to the same level, then leveraged ETF products do not hold any advantages over perpetual futures. On the first day, the price for one BTC rises from $200 to $210, the fluctuation rate is +5%. The NAV of BTC3L becomes $200(1+5%× 3)=$230; On the second day, the price falls from $210 back to $200, the fluctuation rate is -4.76%. The NAV of BTC3L becomes $230(1-4.76%× 3)=$197.16; The overall fluctuation rate in these 2 days is ($197.16 - $200)/ $200× 100%=-1.42%, which is less than 0%.
l Two-sided market: first down, then up
Same as the scenario described above, if the price first goes down, then goes up to exactly the same level, leveraged ETF products are not an ideal investment. On the first day, the price of BTC falls by 5%. The NAV of BTC3L becomes $200 (1-5%×3)=$170; On the second day, the price rises back from $190 to $200. The fluctuation rate is +5.26%. The NAV of BTC3L becomes $170 (1+5.26%× 3)=$196.83; The overall fluctuation rate in these 2 days is ($196.83- $200)/ $200× 100%=-1.59%, which is less than 0%.
Please be warned:
Leveraged ETF products are financial derivatives with high risks. This article should only be considered a
brief analysis instead of any investment advice. Users must have a thorough understanding of the products
and their risks before trading.
Gate.io reserves the final right to interpret the product.
