Why do leveraged index funds have inefficiencies because of rebalancing, but simply using margin to get leverage doesn’t have that same problem?

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Why do leveraged index funds have inefficiencies because of rebalancing, but simply using margin to get leverage doesn’t have that same problem?

In: Economics

2 Answers

Anonymous 0 Comments

If a stock drops by 20% it needs to go up 25% for you to break even.

If you are leveraged 3x your account will drop by 60%, if you are now forced to rebalance and sell that position and rebuy you need the new position to rise by 250% to get back to breakeven (which means the underlying stock will need to rise by 83%).

As an individual you can just ride it out and continue to add money to avoid having to sell and rebuy.

Anonymous 0 Comments

Simply using margin to get leverage doesn’t require that you rebalance daily (or more frequently). And most people using margin do not in fact rebalance daily. If the name of your fund is “2x leverage of SP500” then you need to try to maintain 2x leverage at all times. If the name is “Ben’s marginable etrade acct”, you don’t.