Canadian Securities Course (CSC) Level 2 Practice Exam

What is a characteristic of Leverage Exchange Traded Funds (ETFs) that sets them apart from other types?

1. Low market sensitivity

2. High tracking accuracy

3. Use of actual index assets

4. Utilization of derivatives for leverage

The correct answer is: Utilization of derivatives for leverage

The correct answer highlights a fundamental characteristic of Leverage Exchange Traded Funds (ETFs), which is their usage of derivatives to achieve leveraged exposure to the underlying index or asset. This feature allows leveraged ETFs to amplify the returns (both positive and negative) based on the daily performance of the index they track. By employing derivatives, such as futures contracts, swaps, or options, these funds can provide a multiple of the daily return of the benchmark, often aimed at 2x or 3x the performance. This distinguishes them from traditional ETFs, which typically invest directly in the securities of an index without employing leverage. In contrast, the other options do not accurately describe the unique traits of leveraged ETFs. For instance, while market sensitivity and tracking accuracy can vary across all types of ETFs, they do not serve as defining characteristics for leveraged ETFs specifically. Additionally, the mention of using actual index assets aligns more with traditional ETFs rather than leveraged ones, which primarily rely on derivatives to maintain their leverage.