Hennion and Walsh Your Q&A: How Do Funds Use Leverage?

Kevin D. Mahn is a managing director and chief investment officer at 
Hennion & Walsh.

Advisors have referred to our SmartGrowth fund family as alternative strategies. 
These '40 Act funds, which are essentially funds of exchange-traded funds (ETFs), 
track the Lipper Optimal Target Risk Indices. As a portfolio manager of the family, I 
have taken leveraged short exchange-traded fund positions to implement those 
indices.

The indices are objective, risk-based tools composed of carefully selected ETFs that 
are rebalanced on a quarterly basis. Their overriding objective is providing an 
appropriate combination of ETFs for different levels of risk appetites. The indices, and 
by extension the funds themselves, have taken on several defensive positions since 
the summer of 2007. These defensive positions have not only included bond-oriented 
ETFs but also short and leveraged short ETF positions on certain asset classes, 
sectors, styles and market caps.

ProFunds’ ProShares also offers leveraged positions via ETFs. These types of 
leveraged and non-leveraged short and long ETF products have presented investors 
and advisors with the ability to add diversification and, at times, downside protection 
to their investment portfolios. These products have also afforded mutual fund 
portfolio managers the opportunity to utilize leverage selectively within their own 
fund offerings.

One has to be careful to control the amount of leveraged exposure that one has not 
only to a given asset class, sector, style or market cap but also within one's portfolio 
as a whole. Keep in mind that when the market moves against a particular holding, 
the associated losses are magnified.

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