If SPY drops 34% intraday but recovers by market close, will SPXL bankrupt?

Why wouldn't you take advantage of the free opportunity using the opposite funds to the extent you could. They clearly do that to rebalance daily return inverse and leveraged funds.

 

By "bankrupt" I mean the value of the assets held in the fund drop to 0.

 

Cy; you already have an answer , from Mr TooNerdy, why that is not likely to happen. I noticed several more reasons in the summary prospectus.; including the top ten holdings ........

 

It would not surprise me if the negative and positive ETF's somehow net out the bulk of their positions, but, what I think is surprising is that the second sentence cannot be true for ordinary daily rebalancing (although perhaps you were referring to the emergency scenario we have been discussing, in which case, I of course agree). ETF's with leverage less than zero or greater than one both rebalance in the same direction, buying after the underlying rises and selling after the underlying drops.

 

There are many ETFs that have a standing swap with their inverse fund to offset one another.

The real problem with a move of said magnitude is that the mechanism which ties the ETFs market price to the net asset value of the underlying (NAV) is likely to break. This mechanism known as creation redemption may be halted. Moreover, if the ETF were to halt prior to the index, it becomes impossible for the abiteurs to tie price to NAV. Some ETFs run a consistent premium and discount to NAV for this reason. Deutsch Bank has issues many such products.

 

The DB products you refer to are ETNs, not ETFs, right?

 

Yes I believe you are correct. I think UNL and DNO had creations/redemptions halted as well.

 

I only mention it because that's a unique risk to ETNs that you wouldn't run into with an ETF. I don't think any ETFs are allowed to halt creation and redemption, although in a drop the size of which has never happened in history I guess all bets are off.

 

Yea I agree, if such a move occurred there would be more problems than premium/discount. UNL is an ETF that halted creations. Seems to have been compliance/regulatory related. Pretty interesting, if one could track this regulatory phenominon then there should be an arb in buying the ETF and selling equivalent units of its basket to capture the premium.

 

You know I put that in the back of my mind as something to look into a year or so ago and forgot about it, thanks for bringing it up.