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A leveraged exchange-traded fund (ETF) is a type of financial product designed to track an underlying index at higher rates of return. It can offer returns as high as 2-3 times the returns of a traditional ETF, but that also makes it a riskier investment option.

Leveraged ETFs are quickly becoming one of the most popular types of ETFs. And while they are an aggressive new ETF innovation, they are also a controversial one. Before you can formulate an opinion on whether these new funds are good for you, you need to know the basics.

Definition and Examples of a Leveraged ETF

A leveraged ETF is a type of exchange-traded fund that tries to outperform the underlying asset that it tracks, usually by producing two to three times the return of the correlating asset.

• Alternate names: Geared ETF, geared ETP

For example, if the tracked index rises 1%, a 2x leveraged ETF wants to create a 2% return on investment (ROI). There are also inverse leveraged ETFs, which offer multiple positive returns if an index declines in value. They work the same as normal inverse ETFs; they are just designed for returns of two to three times the opposite of the index.

How Leveraged ETFs Work

Leveraged ETFs are designed to include the securities in the underlying index, but also include derivatives of the securities and the index itself. These derivatives include, but are not limited to:

• Options
• Forward contracts
• Swaps
• Futures

In other words, leveraged ETFs can be tied to different industry sectors, commodities, or currencies, just as regular ETFs can be. However, while they seek to present better returns than the index they track, their inclusion of riskier assets like options, forward contracts, swaps, and futures meant that leveraged ETFs present more risk than a regular ETF.

For example, over the course of a few months, an index could rise by 2% but the leveraged ETF that tracks it could fall by 6%. This is due, in part, to the fact that leveraged ETFs reset daily—the goal is to outperform the market on a daily basis. So, you could see a lot of volatility over time, whereas the index the leveraged ETF tracks will likely be far less volatile. And because leveraged ETFs reset daily, they can lead to bigger losses in volatile markets that you may not experience with the index the ETF tracks.

Benefits of Leveraged ETFs

The most attractive feature of leveraged ETFs is their potential for high returns. With the ability to outperform the underlying index by two or three times on a daily basis, the rewards can be significant. Inverse leveraged ETFs offer investors a chance at better returns even if the market is falling since they can buy short. Because there are so many types of ETF products available, there is a product for almost any investor interested in these benefits.

The Risks of Leveraged ETFs

However, as a derivative product with a high return potential, leveraged ETFs are a fairly high-risk investment.

Using a 2x leveraged ETF as an example, the simple concept is that if the index rises 1%, the leveraged ETF should create a 2% return. However, simple as that sounds, it’s not always the case.

Because a leveraged ETF is designed to create multiple returns on a daily basis, it’s not likely to generate returns that high. So, if an index has a yearly return of 2%, the leveraged ETF will probably not have a return of 4%. It will be more subject to the direction of the daily returns throughout the year.

Another risk of leveraged ETFs is that they can create multiple negative returns. People hear “multiple returns” and think multiple profitsbut a sound investor knows that reward comes at the expense of risk.

Portfolio Management With Leveraged ETFs

Every ETF investment strategy should be evaluated on a case-by-case basis. Using leveraged ETFs is an advanced investment strategy and should not be taken lightly. While ETFs offer many benefits, and leveraged ETFs could possibly increase returns, there are risks involved. You should only attempt to trade these securities with a lot of prior experience—and the help of a good broker.

To get an initial feel for this market, pay attention to how some leveraged ETFs react to market conditions and conduct thorough research. A few examples to follow include:

• DDM–ProShares Ultra Dow30 ETF
• SSO–ProShares Ultra S&P500 ETF

Definition and Examples of Series HH Savings Bonds

Series HH bonds were a type of savings bond program, offered by the US Treasury, that regularly paid out interest to investors. They worked differently from Series EE savings bonds, which instead added that interest income back to the principal value of the bond.

Investors enjoyed the passive income made possible by investing in Series HH bonds. These bonds came with face values ​​of $500, $1,000, $5,000, and $10,000.

How Do Series HH Savings Bonds Work?

When an investor bought a Series HH savings bond, they received a paper certificate that detailed their purchase. If that investor wanted to cash in the bond early, then they needed to return that paper certificate.

While an investor held Series HH bonds, they would receive interest payments every six months. The interest was deposited directly into the bondholder’s bank account, providing a steady source of investment income that could be spent while the bond was still held.

Series HH savings bonds had a minimum holding time of six months. After that, an investor could cash in their bonds for the full face value at any time.

The Interest Rate on Series HH Savings Bonds

The interest rate for the Series HH savings bonds was set every six months. When an investor bought a Series HH bond, they locked in that interest rate for 10 years, after which the rate could be adjusted for the next 10 years. Series HH savings bonds reach maturity and stop earning interest income altogether 20 years after the investor bought them. At maturity, the investor is repaid the face value.

Because the last Series HH bonds were issued in 2004, some are still paying out interest.

Like the Series I savings bond, the Series HH savings bonds could be redeemed for full face value at any time after the minimum holding period. That means investors didn’t need to wait 20 years to get their principal back. However, once an investor receives their principal back, they stop earning interest income.

What It Means for Individual Investors

Since Series HH savings bonds mature after 20 years, the last of these investment vehicles will mature in August 2024, so it’s likely that there are still Series HH savings bonds out there somewhere. However, since these bonds can be cashed early, there may be fewer bonds remaining than were originally issued back in the early 2000s. The bonds that are still held will continue paying interest until they mature 20 years after their dates of issue.

If you own a Series HH Bond, you may still be collecting interest if the bond hasn’t matured yet. You can also cash in the bond if you choose.

While your local bank can’t directly cash out the bonds for you, it can help you take the steps necessary to receive your principal back. Those include certifying your signature on documents and helping you mail bond certificates to the appropriate Treasury Department address.

Alternatives to Series HH Bonds

On September, 2004, the US Treasury Department stopped offering Series HH savings bonds to investors, officially ending the program altogether. While the Treasury Department continues to offer other kinds of bonds, there is not a Series HH replacement that perfectly replicates the features of this program.

If you’re still interested in owning savings bonds, you could choose Series EE bonds, which earn interest for up to 30 years, or Series I bonds, which earn interest that’s tied to the inflation rate.

You could also choose other Treasury securities, such as Treasury bills, notes, and bonds, or Treasury Inflation-Protected Securities (TIPS).