How Do Leveraged ETFs Work?

Direxion ETFs offer investors leveraged or inverse exposure to changing markets with bull and bear flexibility. Direxion Daily 3X ETFs, for example, are designed to provide daily investment results that are 300% of the daily performance of the benchmark index they track.

So what's going on beneath the surface to create leveraged exposure?

"At the end of the day, this is simply a mathematical question," Dave Mazza, managing director and head of product at Direxion, said Tuesday on "Benzinga Live."

What To Know: With $100 invested in one of the 3X Direxion ETFs, it would give the investor $300 worth of exposure because of the leverage embedded in the product, Mazza explained. 

If the index goes up by 1%, the ETF assets would increase from $1 to $3 and total exposure would imply a 3% gain, he said: "What we need to then do is rebalance the portfolio or add additional exposure on that daily basis to go from that initial exposure to what that actually translates to be."

In this example, Direxion would go in and buy at the end of the day in order to rebalance, but if the index were down, Direxion would have to sell, Mazza said. 

"One of the things that I can't emphasize enough ... is that they're daily vehicles," he said. Therefore, all returns are calculated and adjustments made on a daily basis. 

"Because they are amplified, the returns are going to be magnified both positively or negatively," he reiterated. 

Mazza went on to explain the math behind bear funds and how returns are calculated when investors are wrong about market direction. 

See the full interview here:

Photo: OpenClipart-Vectors from Pixabay.