Important information about leveraged, inverse, and commodity exchange-traded products
Leveraged and inverse ETFs and ETNs
What does this mean? On any given day, an investor who uses a leveraged or inverse product can expect a return very similar to the stated objective. However, because of the structure of these products, their rebalancing methodologies, and the math of compounding, extended holdings beyond one day or month, depending on the investment objective, can lead to results very different from a simple doubling, tripling, or inverse of the benchmark's average return over the same period of time. This difference in results can be magnified in volatile markets. As a result, these types of investments are generally not designed for a buy-and-hold strategy, even if the "hold" period covers only several days. Such funds are not intended to be used by investors who do not intend to actively monitor and manage their portfolios. These funds are riskier than alternatives that do not use leverage.
Examples: Assume you purchase a leveraged ETF that is designed to double the return of a particular index on a given day. You purchase the ETF for $100 per share, and the applicable index is at 10,000 that day. The next day, the index is up 10%. You could expect your ETF share to increase by 20% to $120. However, let's say that on the following day, the index declines back down to 10,000. This decrease would constitute a daily decline in the index of 9.09% (from 11,000). The leveraged ETF would have a corresponding daily decline of 18.18%. The ETF share would be priced at $98.18 ($120.00–$21.82). Thus, even though the index is flat over the two-day period, the leveraged ETF has suffered a loss over the same time period.
The following actual performances occurred between December 1, 2008, and April 30, 2009, and highlight the above hypothetical:
Investors should understand the investment objectives of the funds they are purchasing. Before investing, you should read the prospectus carefully. Should you have any questions, please contact Vanguard Brokerage Services® at 800-339-5024.
For additional information, please see this Investor Alert issued by the SEC and FINRA related to leveraged and inverse ETFs.
Risks of commodity ETFs and ETNs
Commodity ETPs may be subject to greater volatility than securities ETPs and may not be appropriate for all investors. Unique risk factors of a commodity product may include, but are not limited to, the product's use of aggressive investment techniques, which can include the use of options, futures, forwards, or other derivatives; correlation or inverse correlation; market price variance risk; and leverage.
Understanding commodity ETFs and ETNs
A futures contract is an agreement to buy or sell a commodity at a certain date for a predetermined price, so its value generally moves along with spot prices of the commodity. However, this correlation is imperfect. In order to avoid taking physical possession of the underlying commodities, commodity products conduct a regular "roll" process, selling contracts nearing expiration and using the proceeds to purchase longer-dated futures contracts. This process of buying longer-dated futures contracts can sometimes be more expensive than simply buying and holding the underlying commodity due to changes in the spot price of the commodity and the amount of time value in the futures contract—a situation known as "contango." Therefore, if the market for a particular commodity is subject to contango, the performance of a commodity-linked product will deviate from the spot-price change of the commodity over the same period of time.
Before investing in a commodity ETP—or any ETP—investors should carefully read the prospectus and consider the product's objectives, risks, charges, and expenses.
Alternative-weighted (smart beta) investments
Also known as "alternative indexing" or "smart beta," alternative-weighted investments are typically ETFs that—like traditional index funds—try to replicate a specific index. Traditional index funds achieve this by weighting securities based on size and market capitalization. Alternative-weighted investments instead use a rules-based approach that looks at different characteristics, such as price momentum, dividend payments, earnings, or volatility—factors typically used in active management strategies. Investors should therefore evaluate alternative-weighted ETFs the same way they would an actively managed investment.
For additional information, please see this Investor Alert issued by the SEC and FINRA related to smart beta.
ETF Shares can be bought and sold only through a broker (who will charge a commission) and cannot be redeemed with the issuing fund. The market price of ETF Shares may be more or less than net asset value.
Past performance is no guarantee of future results.