ETFs (Exchange Traded Funds)
ETFs are typically registered as unit investment trusts (UITs) or open-end investment companies. Shares in an ETF represent an interest in a portfolio of securities that track an underlying index. There is little active management. Since 2008 the SEC does permit on a limited basis some exemptive relief for some types to ETFs to permit a more active management effort. Unlike traditional UITs or mutual funds, shares of ETFs generally trade as any other stock on the Floor of an exchange and are subject to market forces.
A few ETFs direct investment dollars to commodities and currencies. This type of ETF is not registered as investment company
Leveraged ETFs
A leveraged ETF is designed with the view to generate multiples of 200% or 300% of the underlying index it tracks. Leveraged ETFs use futures and swaps in order to amplify the daily returns on its benchmark. For example, a daily large cap bull 3x shares would attempt to provide daily returns amounting to 300% of the daily return on its target index. If that index, let’s say the Russell 1000 rises 1% for a single trading session; the shares in the leverage ETF should rise by about 3%. Because leveraged ETFs use options, swaps and futures, they are inherently more volatile than their underlying index.
Inverse ETFs
Some leveraged ETFs are “inverse” or “short” funds. These ETFs look to deliver the opposite of the performance of the index or benchmark they track.
Margin Requirements for ETFs
Because leveraged ETFs experience higher volatility compared to their non-leveraged ETFs, higher margin requirements are placed on them.
Strategy-Based Margin Account
In a strategy-based margin account, the maintenance margin requirement for any long ETF was 25% of the market value, and for any short ETF, the maintenance margin requirement was generally 30% of the market value.
Maintenance margin requirements are now a percentage commensurate with the leverage of the ETF, not to exceed 100% of the value of the ETF, as detailed in the following examples:
Long 100 shares ABC ETF @ 28.00 (200% leverage) Market Value: 2,800 Maintenance Requirement: 2 x .25 = .50 2,800 x .50 = 1,400
Long 100 XYZ ETF @$50 (200% leverage) Current Market Value: $5,000
Maintenance Requirement: 2 x .25 = .50 $5,000 x .50 = $2,500
Short 100 shares DEF ETF @ $60 (300% leverage) Market Value: $6,000 Maintenance Requirement: 3 x .30 = .90 $6,000 x .90 = $5,400
ETF Net Capital Haircuts
An exchange traded fund tracking a high-capitalization broad-based indexes such as SPDRs is subject to a 10% haircut. ETFs tracking the riskier non-high-capitalization broad-based and narrow-based or sector index is subject to a 15% haircut against capital.