Hong Kong Prepares to Authorize Leveraged ETFs, Reuters Says

Hong Kong’s markets regulator is planning to authorize exchange-traded funds that can leave investors nursing losses, according to Reuters.

Jonathan Li and Ernest Kong, spokesmen for the Securities and Futures Commission, didn’t immediately return phone calls after office hours seeking a comment.

The SFC will publish rules allowing leveraged and inverse ETFs within days, the news agency reported.

Leveraged ETFs use derivatives to increase the size of gains or losses on an underlying index. Inverse ETFs utilize derivatives to profit when the underlying investment drops in value. They provide a way for smaller investors to take short positions on financial markets. While shorting an index can be highly profitable in falling markets, investors can quickly accumulate losses when markets rebound.

Hong Kong will probably begin by authorizing the higher-risk ETFs for investments based outside greater China, according to Reuters. Funds using the city’s equities as their underlying investment would probably follow in a second phase.

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