Question

A 200% Leveraged Dow Jones Industrial Average Index ETF would be expected to move:

I) up 50% in price when the DJIA moves up 100%
II) up 100% in price when the DJIA moves up 50%
III) down 50% in price when the DJIA moves down 100%
IV) down 100% in price when the DJIA moves down 50%

A) I and III
B) I and IV
C) II and III
D) II and IV

Answer 1

For a 200% leveraged ETF tracking the DJIA, we expect it to rise 100% when the DJIA rises 50% and to fall 100% when the DJIA falls 50%, making the correct answer D) II and IV.

Step-by-step explanation:

To answer the question regarding the expected movement of a 200% Leveraged Dow Jones Industrial Average Index ETF, we need to understand what leveraging in ETFs means. A leveraged ETF aims to return a multiple of the performance of the index it tracks for a single day. Therefore, a 200% leveraged ETF seeks to double the daily performance of the index. With that being said, here are the proper expectations for such an ETF:

• If the DJIA moves up 100%, a 200% leveraged ETF would expect to move up 200%, not 50%. Hence, option I is incorrect.
• If the DJIA moves up 50%, a 200% leveraged ETF would expect to move up 100%. Therefore, option II is correct.
• If the DJIA moves down 100%, which would mean the index has lost all its value, it's not practical to measure the performance of the ETF, as the index value cannot be less than zero. However, theoretically, a leveraged ETF would lose all its value too, so option III is not interpretable in real-world terms.
• If the DJIA moves down 50%, a 200% leveraged ETF would expect to move down 100% in price. Hence, option IV is correct.

Therefore, the correct answer to which movements can be expected from a 200% Leveraged Dow Jones Industrial Average Index ETF is D) II and IV.