Lecture 4: Rebalance Mechanism of Leveraged ETF

Generally, the rebalance will be performed at 00:00:00 (UTC+8) every day to avoid the enlargement of the gap between portfolio's leverage ratio and the agreed ratio. When there is a sharp fluctuation and the underlying asset ’s fluctuation exceeds a given threshold figure compared to the previous rebalance point (initially we set the threshold figure for 3x leverage short and long as 15%. In the future, if other leverages available, the figure may be adjusted.), we will perform rebalancing to control the risk of the investment portfolio in time. The rebalancing is only for the party that has lost money in the volatile market. For example, if the BTC rises by 15%, we will rebalance the BTC1D3S product, and will not adjust BTC1D3L. Please note that when the market trend continue to rise or fall after rebalancing, user’s loss will be decreased, but if the market trend converses after rebalancing, the bounce of the product price may also become weaker than that before the rebalance triggered.

Return Rate Dynamism

Take BTC1D3L (BTC 3x long product) as an example.

If the daily trend of the BTC in spot market in four days is +10%, +10%, +10%, +10% respectively, the return rate of BTC1D3L will be 185%, higher than the 3 times of the return rate of BTC in spot market (that is 44%);

If it is -10%, -10%, -10%, -10% respectively, the return rate will be -76%, lower than the 3 times of return rate of BTC in spot market (that is 35%);

If it is +10%, -10%, +10%, -10%, the return rate of BTC1D3L in four days will be -17%, underperform the 3 times of BTC’s return rate in four days of 2%.

Therefore, we can see that when it exceeds a rebalance period circle, the accumulated return rate of leveraged ETF product is unable to keep fixed leverage to that of the spot product. Specifically, under a single market trend (rise/fall), the performance of leveraged ETF will overtake the claimed leverage times (i.e. the accumulated increase amount of leveraged ETF product in the same direction will surpass the 3 times of return rate of the underlying asset, and the accumulated decrease amount of the inverse leveraged ETF product will be smaller than the 3 times of the underlying asset’s return rate). However, the performance of leveraged ETF product under fluctuation market will underperform the claimed leverage times.

Rebalance mechanism of 5x product is different, we can check it in Lecture 6.

Disclaimer

Leveraged ETF is an emerging financial product. The content above does not constitute investment advice. Please watch out investment risks.

Leveraged ETF reduces the risks of liquidation, but in extreme conditions there’s possibility that the price will approach zero and be liquidated. Please pay attention to the difference between order price and net value, to avoid losses.