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
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.
Latest Answers