Home > Investor Resources > Mutual Fund Essentials >Leveraged and Inverse Investing:Summary

As illustrated by these simple examples, the effect of leverage can make it difficult to form longer-term expectations or judgments about a leveraged fund’s performance given only the returns of the unleveraged index. As a general rule of thumb, more leverage will magnify the compounding effect. In addition, periods of high volatility in an underlying index will also cause the effects of compounding to be more pronounced.

The Importance of Monitoring Inverse and Leveraged Investments

It is important for investors to understand the possible effects of compounding on leveraged and inverse mutual funds or ETFs before making any investment decisions. Investors should monitor their leveraged and inverse holdings to ensure that they are consistent with their strategies, as frequently as daily, and consult with their financial advisor before deciding what, if any, course of action to take for their particular situation.

Inverse and leveraged Funds are not suitable for all investors. •These Funds should be utilized only by investors who (a) understand the risks associated with the use of leverage, (b) understand the consequences of seeking daily leveraged investment results, (c) understand the risk of shorting, and (d) intend to actively monitor and manage their investments. •The more a Fund invests in leveraged instruments, the more the leverage will magnify any gains or losses on those investments. •Inverse Funds involve certain risks, which include increased volatility due to the Funds’ possible use of short sales of securities and derivatives, such as options and futures. •The Funds’ use of derivatives, such as futures, options and swap agreements, may expose the Funds’ shareholders to additional risks that they would not be subject to if they invested directly in the securities underlying those derivatives. •Short-selling involves increased risks and costs. You risk paying more for a security than you received from its sale. •Leveraged and inverse Funds seek to provide investment results that match the performance of a specific benchmark, before fees and expenses, on a daily basis. Because the Funds seek to track the performance of their benchmark on a daily basis, mathematical compounding, especially with respect to those Funds that use leverage as part of their investment strategy, may prevent a fund from correlating with the monthly, quarterly, annual or other period performance of its benchmark. Due to the compounding of daily returns, leveraged and inverse Funds’ returns over periods other than one day will likely differ in amount and possibly direction from the benchmark return for the same period. For those Funds that consistently apply leverage, the value of the fund’s shares will tend to increase or decrease more than the value of any increase or decrease in its benchmark index. The Funds rebalance their portfolios on a daily basis, increasing exposure in response to that day’s gains or reducing exposure in response to that day’s losses. Daily rebalancing will impair a fund’s performance if the benchmark experiences volatility. Investors should monitor their leveraged and inverse Funds’ holdings consistent with their strategies, as frequently as daily. •For more on these and other risks, please read the prospectus.

This piece is intended to be for information purposes only. Investors should discuss these concepts and their personal financial situation with their financial advisor or advisors prior to making any investment decisions.

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