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What return objective do leveraged and inverse ETFs set for themselves?
AA multiple of an index return over each quarter
BA return equal to an index over any holding time
CA fixed income stream paid from index dividends
DA multiple of an index return on a daily basis
Answer & Solution
Correct answer: D. A multiple of an index return on a daily basis
1. These funds track a securities index, so they are a subset of index-based ETFs.
2. Their stated objective is a multiple, or an inverse multiple, of the daily return of that index.
3. The objective is set on a daily basis, not over a quarter or over an open-ended holding period.
4. Performance over a period longer than one day will probably differ significantly from the stated daily objective.
5. That is why they are described as specialized products typically not suitable for buy-and-hold investors.
6. They often use short sales, swaps and futures, which add further risk rather than a fixed income stream.
_Source: US SEC Office of Investor Education and Advocacy, "Mutual Funds and ETFs: A Guide for Investors", section Leveraged, inverse and inverse leveraged ETFs_
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