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Gate.io > Help Center > Guide > Common Questions
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Guide to Leveraged ETF Products (Chapter I)
Gate.io
Updated at:629 days 9 hours ago
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Q1 : What are leveraged ETF products?

Leveraged tokens are similar to conventional ETC products on the stock market. They track the price fluctuations of the given target asset.

These price fluctuations are about 3 or 5 times that of the underlying assets' market. Different from conventional margin trading, users do not need to pledge collateral when trading leveraged tokens.

Users can achieve the purpose of trading on margin through simple buying and selling of leveraged tokens.

Each leveraged ETF product corresponds to a contract position, which is managed by fund managers.

Using leveraged ETF products allows you to easily build your own constant leverage investment portfolio without having to learn about the specific mechanisms.

Q2 : What is the underlying asset?

A : The name of a leveraged ETF product consists of the name of its underlying asset and the leverage ratio. For example, the underlying asset of BTC3L and BTC3S is BTC.

Q3 : How much is the total volume of ETF products?

Similar to perpetual contracts, leveraged ETF products are financial derivatives, not typical crypto tokens. So there is no "total volume" or “burned volume" for leveraged ETF products.

Q4 : How do leveraged ETF products amplify gains?

Leveraged ETF products amplify losses and gains by amplifying the price fluctuations. Say after position adjustment, the price of BTC rises by 5%, (not considering the possibility of irregular rebalancing getting triggered), the price of BTC3L will rise by 15% and BTC3S will fall by 15%.

Q5 : How are leveraged ETF products different from margin trading?

1.Margin trading is to amplify gains and losses by adding margin loans to total investment. The leverage ratio multiplies the volume of assets that a user holds. Leveraged ETF products amplify gains by amplifying the price fluctuations of the underlying asset's price. The leverage ratio is reflected in the price fluctuations. 2.Leveraged ETF products do not require traders to pledge collateral or borrow loans. There is no risk of liquidation when trading leveraged tokens.

Q6 : How are leveraged ETF products different from perpetual contracts?

1.Trading leveraged ETF products does not require collateral and is free from liquidation. 2.Fixed leverage ratio: The actual leverage in the perpetual contract varies with the fluctuation of the position value. Positions of leveraged ETF products are adjusted on a daily basis. The leverage ratio almost always stays between 3 and 5.

Q7 : Why are leveraged ETF products free from liquidation?

Fund managers of Gate.io adjust futures positions dynamically so that leveraged ETF products can maintain a fixed leverage ratio for a certain period. When leveraged ETF products are profitable, positions will be increased right after position adjustment. In the event of a loss, positions will be reduced, so as to eliminate the risk of being liquidated. Note: Position adjustment is to adjust the contract positions behind the ETF products. Traders' currency holdings do not change.

Q8 : When are position adjustments scheduled?

For 3X leveraged ETF products: 1.Irregular rebalancing: When the real-time leverage ratio exceeds 3, irregular rebalancing will be triggered and the position adjustment mechanism will adjust the leverage ratio to 2.3. 2.Regular rebalancing: 00:00UTC+8 every day is the regular rebalancing time. When the real-time leverage ratio goes below 1.8 or above 3, or the fluctuation rate (calculated with contract index price) exceeds 1% (because of a significant increase or decrease in the underlying currency's price in the last 24 hours), the position adjustment mechanism will adjust the leverage ratio to 2.3.

For 5X leveraged ETF products: 1.Irregular rebalancing: When the real-time leverage ratio exceeds 7, irregular rebalancing will be triggered and the position adjustment mechanism will adjust the leverage ratio to 5. 2.Regular rebalancing: 00:00UTC+8 every day is the regular rebalancing time. When the real-time leverage ratio goes below 3.5 or above 7, or the fluctuation rate (calculated with contract index price) exceeds 1% (because of a significant increase or decrease in the underlying currency's price in the last 24 hours), the position adjustment mechanism will adjust the leverage ratio to 5.

Q9 : Why are there management fees?

Gate.io's 3S and 5S ETF products come with a daily management fee of 0.1%.The daily management fee includes all costs incurred by trading leveraged tokens, including handling fees of contract trades, funding fees, and frictional expenses due to price differences when opening positions, etc.

The 0.03% daily management fee charged in FTX's ETF products does not include any of the fees mentioned above. Ever since ETF products were first launched on Gate.io, excluding handling fees in spot trading from the calculation, management fees Gate.io charges in ETF products have been unable to cover all of the costs. Gate.io will continue to pay the extra cost for users instead of taking it from the net asset value (NAV).

Soon Gate.io will launch products such as combined ETF products and low-leverage reverse ETF products. Through unique technical optimization, they can greatly reduce costs, make trading easier and lower management fees.

Q10: Why is the net asset value of ETF products that end with "BULL" and "BEAR" is not displayed?

The ETF products ending with "BULL" and "BEAR" are not managed by Gate.io. Gate.io only provides spot trading services and cannot display NAV in real-time. Please be sure to fully understand the risks before trading ETF products. The deviation between the trading prices and NAV can be larger than expected due to insufficient liquidity in the market. BULL and Bear products are going to be delisted on Gate.io soon. To learn more about these products, please refer to FTX's product manuals.

Q11: What is net asset value (NAV)?

Net asset value represents the net market value of the currency entity. The formula for calculating NAV: Net asset value (NAV) = NAV of the previous rebalancing point(1+price change of the underlying currencytargeted leverage ratio)

Note: NAV at the previous rebalancing point refers to the NAV of the positions after the last position adjustment.

The actual trading price of leveraged ETF products in the secondary market is anchored to the NAV of the currency. There is a certain deviation from the NAV, although the deviation will not be too large. For example, when the NAV of BTC3L is $1, the trading price in the secondary market can be $1.01, or $0.09. Gate.io lists the NAV of leveraged ETF products and the latest trading prices at the same time so that users can notice the potential loss when buying/selling leveraged tokens at prices deviating too much from the NAV.

Q12 : Where is the 3-time price fluctuation amplification reflected exactly in Gate.io's leveraged ETF products?

The price fluctuations of leveraged ETF products are the 3-time amplification of the price fluctuations of the underlying currency, which is reflected in the change of NAV. For example, BTC is the underlying currency of BTC3L and BTC3S. The price of BTC in a certain time period on a trading day (the price at 00:00 is the opening price) and the NAV of the corresponding time period are as follows: The price of BTC rises by 1%, NAV of BTC3L increases by 3%, NAV of BTC3S decreases by 3%; The price of BTC falls by 1%, NAV of BTC3L decreases by 3%, NAV of BTC3S increases by 3%.

Q13 : How are the price fluctuations calculated in Gate.io's leveraged ETF products?

The fluctuations are calculated based on the NAV. Let's take the intraday fluctuations as an example:

Table for intraday price fluctuation rate of leveraged ETF products underlying asset 3L 3S

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Q14 : Does the position adjustment mechanism (rebalancing) increase/decrease the number of position holdings?

No. Position adjustments are made by Gate.io to the contract positions in order to maintain the leverage ratio at 3. Position holdings of the traded currency do not change.

Every time a position is adjusted, the calculation base of the NAV will change. For example: When the positions are adjusted at 00:00, the NAV is $1, then the NAV of the previous rebalancing point is $1. The current NAV calculation formula is $1×{1+ price change of the underlying currency*targeted leverage ratio}.

Before the next position adjustment, the NAV is always based on $1 and changes with the fluctuations of the underlying currency.

If an irregular position adjustment is triggered when the NAV becomes $0.7, then after the adjustment, the NAV of the previous rebalancing point becomes $0.7, and the current NAV is calculated as $0.7×(1+ price change of the underlying currency* targeted leverage ratio).

Q15 : What is irregular rebalancing?

In the event of extreme price fluctuations in the market, in order to prevent contract hedging and liquidation, irregular rebalancing will be triggered.

Before 10:00 on March 16, 2020, Gate.io adopts a price fluctuation rate of 15% (positive or negative) compared with the previous rebalancing point as the irregular rebalancing threshold.

Because the cryptocurrency market has been quite volatile, and irregular rebalancing is triggered more frequently. From 10:00 on March 16, 2020, Gate.io will use a price fluctuation rate (positive or negative) of 20% compared to the last rebalancing point as the threshold.

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