Margin Requirements for Leveraged ETFs

The Financial Industry Regulatory Authority (FINRA) increased the maintenance requirements for leveraged exchange-traded funds (ETFs) in day trading margin accounts beginning on April 30, 2010. For more information about what constitutes day trading, visit Counting Day Trades or the Day Trading Q&A in the Knowledge Center.

Leveraged ETFs mix equities with derivatives to magnify exposure to the benchmark index, and they have daily investment objectives. Leveraged ETFs are generally either two-times (2x) leveraged or three-times (3x) leveraged, meaning that while a regular ETF will attempt to match the benchmark index's performance 1:1, a leveraged ETF will usually match it 2:1 or 3:1.

The FINRA intraday maintenance requirements for leveraged ETFs are 25% multiplied by the amount leverage on an ETF. So, a 2x leveraged ETF will have an intraday maintenance requirement of 50% (25% x 2), and the intraday maintenance requirement for a 3x leveraged ETF would be 75% (25% x 3):

Exchange-Traded Fund

Intraday Maintenance Requirement

2x Leveraged ETF

50%

3x Leveraged ETF

75%

Scottrade's overnight maintenance requirements for leveraged ETFs are slightly higher, as follows:

Exchange-Traded Fund

Overnight Maintenance Requirement

2x Leveraged ETF

55% (long) or 60% (short)

3x Leveraged ETF

85% (long) or 90% (short)

 

Impact on Day Trading Buying Power

Day trade buying power (DTBP) is also impacted by the amount of leverage on a leveraged ETF purchased. Day trade buying power for a leveraged ETF is calculated by dividing your maintenance excess at the beginning of the day by FINRA's maintenance requirement of the fund you're purchasing.

For example, if you have $10,000 in maintenance excess at the beginning of the trading day, you would normally divide by the NYSE minimum maintenance requirement of 25% (.25) to arrive at your DTBP of $40,000. However, if you're buying leveraged ETFs, your DTBP changes according to the intraday maintenance requirements:

If you purchased a ...

Your DTBP would be ...

Non-Leveraged ETF

$40,000 ($10,000/.25)

2x Leveraged ETF

$20,000 ($10,000/.50)

3x Leveraged ETF

$13,333 ($10,000/.75)


As you purchase leveraged ETFs on margin, the impact to your DTBP changes proportionately to the amount of leverage on the ETF. To determine the impact to your DTBP, you need to divide the maintenance requirement for your purchase by the NYSE minimum maintenance requirement of 25%. Let's look at an example:

Say you have $20,000 DTBP, which is your fictional maintenance excess of $5,000 divided by the NYSE minimum maintenance requirement of 25% as shown above ($5,000/.25 = $20,000).

You buy 100 shares of a 3x leveraged ETF at $25 per share, which comes to $2,500.

Your maintenance requirement for the purchase is $2,500 x .75 (FINRA's maintenance requirement for a 3x leveraged ETF), which comes to $1,875.

The intraday impact to your DTBP is $1,875/.25 (the NYSE minimum maintenance requirement), or $7,500. Notice that $7,500 is three times the purchase price of your 3x leveraged ETF.

Your DTBP is now $12,500 ($20,000 - $7,500 = $12,500).

For more information about maintenance requirements for leveraged ETFs, please contact your local branch office.

Margin trading involves interest charges and risks, including the potential to lose more than deposited or the need to deposit additional collateral in a falling market. Scottrade's margin agreement, available at scottrade.com or through a Scottrade branch office, contains the Margin Disclosure Statement and information on our lending policies, interest charges and the risks associated with margin accounts.

Investors should consider the investment objectives, charges, expense, and unique risk profile of an Exchange-Traded Fund (ETF) carefully before investing. Leveraged and Inverse ETFs may not be suitable for all investors and may increase exposure to volatility through the use of leverage, short sales of securities, derivatives and other complex investment strategies. These funds' performance will likely be significantly different than their benchmark over periods of more than one day, and their performance over time may in fact trend opposite of their benchmark. Investors should monitor these holdings, consistent with their strategies, as frequently as daily. A prospectus contains this and other information about the ETF and should be obtained from the issuer. The prospectus should be read carefully before investing.