An ETF rebalancing mechanism is a mechanism to maintain target leverage by adjusting positions held to increase or decrease the underlying asset (the futures of corresponding cryptos). As the price of the underlying asset rises, the ETF product will increase the position, and conversely, if the underlying asset price falls, it will reduce the position. Therefore, in order to ensure that the arranged leverage multiple of the ETF product is in the consist with the leverage multiple of the actual underlying asset, the platform introduces a rebalancing mechanism.
How to rebalance
ETF products are generally rebalanced at 16:00:00 (UTC) daily to ensure the leverage multiple remains at the stated number. When there is a sharp fluctuation and the underlying asset’s fluctuations exceed a given threshold (15% for both 3x long and short) MEXC will rebalance the fund in order to bring its leverage in line with the 3x ratio again immediately. This rebalancing only applies to the party that has made a loss. For example, if the price of BTC rises by 15%, the BTC3S product will be rebalanced, but BTC3L will remain unchanged.
Please note that if the market trend reverses after the fund is rebalanced, the price of the ETF may rebound weaklier prior to the rebalance, relative to the price of the underlying asset.
As mentioned earlier, the ETF product will be reinvested in that profit daily after making a profit, achieving a compound interest effect. If there is a loss, the selling part of the position is restored to 3 times leverage to avoid the risk of forced liquidation.
Examples of rebalancing
Take BTC3L as an example
1. If the daily trend of BTC is +10%, +10%, +10%, +10%
Then the product’s 4-day yield is 185%, which is higher than the 4-day triple spot yield (138%).
2. If the daily trend of BTC is -10%, -10%, -10%, -10%,
Then the product’s 4-day loss is -76%, which is less than the 4-day triple spot loss (-105%);
3. If the daily movement of BTC is +10%, -10%, +10%, -10%,
Then the product’s 4-day yield is -17%, which is more than the 4-day triple spot loss (-6%).
Additional Notes:
1. Definition of a rebalancing cycle
Taking the position adjustment time as a point, a complete rebalancing cycle refers to the time period from the last position adjustment to the current position among them. Rebalancing is divided into two types: scheduled rebalancing and unscheduled rebalancing.
Scheduled Rebalancing: Normally a system rebalancing is performed at 0:00 a.m. in Singapore.
Unscheduled rebalancing: When the daily rise and fall of the underlying asset exceeds the set threshold, the system conducts a temporary position adjustment.
2. Management Fees
At 0:00 Singapore time every day, ETF products will charge an administration fee based on a rate of 0.001% per time, which is directly reflected in the change in ETF equity.
Closing thoughts
The ETF rebalancing mechanism is a mechanism to maintain the target leverage through adjustment, which can achieve compound interest effects and risk control, but also has certain disadvantages. After a rebalancing cycle, ETF products do not guarantee a fixed multiple of multi-day cumulative yields and spot yields. Generally speaking, under trend markets, ETF products will perform better than the declared leverage multiples, while in volatile markets, ETF products will perform worse than the declared leverage multiples.
Disclaimer: Trading crypto involves significant risk and can result in the loss of your invested capital. The materials are not related to the provision of advice regarding investment, tax, legal, financial, accounting, consulting, or any other related services and are not recommendations to buy, sell, or hold any asset. MEXC Learn solely provides information, but not financial advice. You should ensure that you fully understand the risk involved before investing.
