The Fund aims to replicate the leveraged daily returns of the Underlying Stock and the Fund’s performance for periods greater than a trading day will be the result of each day’s returns compounded over the period, which is very likely to differ from the Underlying Stock’s performance, before fees and expenses. Compounding affects all investments but has a more significant impact on funds that aims to replicate leverage daily returns. For a Fund aiming to replicate 1.5 times the daily performance of an Underlying Stock, if adverse daily performance of the Underlying Stock reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Underlying Stock increases the amount of a shareholder’s investment, the dollar amount lost due to future adverse performance will increase because the shareholder’s investment has increased.
The effect of compounding becomes pronounced as the Underlying Stock volatility and the holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment in the Fund is held and the volatility of the Underlying Stock during shareholder’s holding period of an investment in the Fund.
Taking the example of a 1.5x long exposure, we look how this might play out under different market conditions:
Trending markets: hypothetical performance, excluding fees and other adjustments
Volatile and directionless markets: hypothetical performance, excluding fees and other adjustments
Under volatile conditions, the performance deviation will be exacerbated by an increase in the volatility of the underlying stock.
Note. These charts are for illustration purposes to show the potential impact of daily rebalancing on returns for holding periods of longer than a single trading day.  Further details about compounding and its effects are available in the Prospectus relating to the ETFs.