Solving a Vexing Problem

Exchange Traded Funds (ETFs) have been one of the booming areas in financial markets. And one of the most popular classes of ETFs are “leveraged” and “inverse” ETFs which allow traders to apply a multiplier to the change in value of the underlying index. Some leveraged funds appreciate double or triple the change in the underlying average. Inverse funds appreciate inversely to the change in the underlying index and they can also appreciate in multiples to the inverse of the change in the index.

A problem that has been widely reported in the use of these funds is that they can lose fidelity with their underlying index after the first day of trading. As such, investors who are not day traders may accurately judge the direction of the index and still lose money on a leveraged or inverse fund.

This problem is not the result of charlatanism or unethical behavior.  It is the simple mathematical consequence of the way these funds have been constructed.  These constructions cause the funds to be path dependent.  That is, the value of the fund depends not only on the value of the underlying index, but also on the path the index took to arrive at that value.  Fund value erodes when the path taken by the index experiences significant changes in direction (volatility).

Phi-Funds™ has devised a leveraged fund technology that overcomes this shortcoming.  The value of a Phi-Fund™ leveraged ETF maintains fidelity with its underlying index at all times.  In fact, the value of the fund can be specified for any value of the underlying index because it is completely path independent.  If the index is up, the fund will always be up.   In fact, Phi-Funds™ are so predictable that for any value of the underlying index, the value of the fund is known in advance.  If an investor expects an index to rise for 1500 to 2000, he will know when he purchases the fund, what its value will be when the index reaches 2000 — regardless if it took 2 weeks or 2 years to get there and regardless of the ups and downs it experienced in getting there.

Furthermore, the Phi-Fund™ construction can be used for any leverage multiplier – including inverse multipliers.

As a result, long-term, buy-and-hold investors can invest in an index and reap leveraged rewards over extended holding periods without fear of having their funds value eroded by market volatility.

Finally, Phi-Fund™ technology can be applied to a wide array of funds:  ETFs, Exchange Traded Notes (ETNs), mutual funds, hedge funds, pooled wealth management funds, etc.

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