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Frequently Asked Questions
  Are there additional risks associated with investing in Leveraged and Inverse ETPs?
Identification Number 1539

Unlike many ETPs, Leveraged and Inverse ETPs are constructed to provide a stated return on a daily basis. Holding these ETPs for longer than a day significantly increases the risk that the product will not perform as intended. Compounding returns of periods greater than a day could cause the return at the end of the holding period to differ significantly from the expected return.

For example, a fund is designed to track the inverse return (-1x) of an index. Both the fund and the index begin with a value of 100.

Day 1: the index declines 10% to 90. Thus, the fund increases 10% to $110.

Day 2: the index increases 20% to 108. Thus, the fund decreases 20% to $88.

Day 3: the index declines 20% to 86.4. Thus, the fund increases 20% to $105.60.

Day 4: the index increases 20% to 103.68. Thus, the fund decreases 20% to $84.48.

Over the four day period, the index increased 3.68% but the value of the fund decreased 15.52%. While the fund operated as designed, investors could be confused that the decrease in the value of the fund over these four days was significantly different than the simple inverse return of -3.68%. In fact, because of daily compounding, it is actually more than four times lower.

Publication Date*: 5/29/2018 Mailto Link Identification Number: 1539
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