leveraged (2x, 3x) index funds. How do they work?
In: Economics
with a normal index fund there will be some kind of holding organizations that will in most cases physically buy the stocks that are in the index fund and therefor they get a 1:1 representation of what the market movements are.
For leveraged index funds this is not possible, these funds instead buy derivatives, these are contracts between different participants on the financial markets.
what they will essentially do is go to some bank or other financial institution and create a contract thats essentially betting on movements of the stocks that are in the index fund instead of actually buying them.
these contracts can say virtually anything, you could make it 1000 times leveraged if you wanted to but that of course comes with significant risk and also some cost.
in the end nobody is buying or selling anything, they are all just saying “Lets pretend we did and then do the math on what would have happened”
the entire derivative market is a huge game of “lets pretend”
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