**What is an ETF?
ETF refers to a fund product that uses financial derivatives such as contracts to track and replicate the price performance of underlying assets, often with amplified exposure (e.g., 3x, 5x). It provides leveraged exposure to the underlying assets. When trading ETFs, no margin is required and there is no liquidation risk, allowing users to achieve leveraged trading through simple buy and sell operations.
In other words, an ETF multiplies the return of an ordinary digital asset by several times. When the return of the underlying asset changes by 1 %, the net value of the ETF will change by a target multiple, such as 3 % or 5 %. While traditional ETFs in the financial sector track a combination of stock indices, Gate ETFs track and amplify the performance of the spot price of a single variety of digital currency as the underlying asset.
ETF Name
The name of an ETF consists of "Underlying Asset", "Target Leverage" and "Direction". For example:
- Underlying Asset: The underlying asset of an ETF is the currency it tracks. For example, the underlying asset of BTC3L and BTC3S is BTC.
- Target Leverage: 3x for BTC3L and BTC3S and 5x for BTC5L and BTC5S.
- Direction:
BTC3L: 3x Long Token for BTC (Long = Long) BTC3L is an ETF that holds a long position in the BTCUSDT perpetual contract with 3x leverage and buys, i.e., 3x long BTC. For every 1 %increase in the price of BTC, BTC3L's NAV will increase by 3 %.
BTC3S: 3x Short Token for BTC (Short = Short) BTC3S is an ETF that holds a short position in the BTCUSDT perpetual contract with 3x leverage and buys, i.e., 3x short BTC. For every 1 %drop in the price of BTC, the Net Asset Value of BTC3S will rise by 3 %.
Principles of operation of ETFs
An ETF is essentially a fund managed and issued by a team of financial professionals, with an initial NAV of 1 USDT per ETF.
Behind each variety of ETF, there corresponds to a certain number of contract positions. Through perpetual contract market hedge management, the platform fund manager dynamically adjusts the contract positions in response to market volatility, ensuring that the leverage ratio is maintained at a target level (e.g. 3x or 5x).
ETF fund managers dynamically adjust contract positions through the rebalancing mechanism so that the fund's NAV can maintain a fixed leverage multiple over a certain period of time (on a daily basis) to achieve the effect of magnifying returns. The fund manager will charge an amount of 0.1 % of the fund's NAV as a management fee for daily position adjustments, which is used to cover expenses such as contract market fees and funding rates.
Net value of ETFs
An ETF is essentially a fund. Therefore, although the trading mechanism of ETFs is similar to spot trading, when users purchase the corresponding ETF products on the Gate platform, the product traded is not the spot price of the digital currency but the fund shares of the corresponding ETF. Similarly, the transaction price when users buy and sell ETF products is not the spot price of digital currency, but the net asset value of the corresponding ETF.
For example, take the ETF product BTC3L as an example, for the sake of understanding, let's say you bought 300 units of BTC3L at a price of 1 USDT, i.e., you are currently holding 300 USDT worth of BTC3L, then in this example, the 300 USDT worth of BTC3L you are holding is not the spot price of BTC valued at 300 USDT, it is the fund share of BTC3L ETF product; 1 USDT is also not the spot price of BTC, but the NAV of the BTC3L ETF product. In this example, the 300 USDT of BTC3L you are currently holding is not the spot price of BTC worth 300 USDT, but the NAV of the BTC3L ETF product.
Net value calculation
Net Asset Value (NAV), i.e. the actual value of the fund, reflects the fair value of the fund's assets in the secondary market for each unit of share currently held by the user, and is the price at which the user can buy or sell the ETF.
For ETFs with different leverage multiples, the net asset values of ETFs are calculated as follows:
ETF NAV = Previous Rebalance Point NAV × (1 + Underlying Currency Rise or Fall × Target Leverage Multiple)
The basis for calculating the net worth changes with each position transfer.
For example, if the NAV is 1 USDT at the time of position transfer at 0:00, the NAV at the previous rebalancing point will be 1 USDT, and the NAV will be 1 USDT all the time during the period, following the ups and downs of the underlying cryptocurrency.
If a time-varying position transfer is triggered when the NAV becomes 0.7 USDT, then after this transfer, the previous rebalancing point NAV becomes 0.7 USDT, and thereafter the current NAV is calculated as 0.7 × {1 + underlying currency's upside or downside × target leverage multiple}.
Net split, consolidation
For the purpose of lowering the threshold for users to enter into trading, improving the sensitivity of ETF NAV price changes and optimizing the trading experience, Gate will from time to time split or merge the NAVs. When it is necessary to split the NAV, Gate will announce to users in a timely manner. Among them, NAV splitting and merging only affects the display of NAV price and ETF quantity, and does not affect the total asset value of ETFs held by users.
Rebalancing mechanism for ETFs (repositioning)
The leverage level of an ETF changes when the price of the underlying asset moves, requiring regular position adjustments to the underlying asset contract to maintain a fixed target leverage multiple.
Rebalancing refers to adjusting the proportion of various assets in a portfolio. In the case of Gate ETFs, rebalancing means that the fund manager adjusts its position in the cryptocurrency perpetual contracts underlying the ETF.
There are two specific types of rebalancing:
Timed rebalancing: The fund's leverage ratio is tracked and maintained on a daily basis based on daily market fluctuations, i.e., the fund's assets are liquidated at a fixed time each day, and the amount of leverage to be built up is recalculated based on the adjusted NAV of the fund to ensure maximum tracking of the target multiple.
3x ETF:
- 3 times long: daily 0:00 (UTC +8), when the leverage within 2.25-4.125 times floating, do not adjust the position; when the leverage breaks through the above range or the underlying asset rose or fell more than 1 %(based on the price of the contract index), the leverage multiplier is adjusted to 3x;
- 3 times short: daily 0:00 (UTC +8), when the leverage is floating within 1.5-5.25 times, do not adjust the position; when the leverage breaks through the above range or the underlying asset rose or fell more than 1 %(based on the price of the contract index), the leverage multiplier is adjusted to 3x.
5x ETF:
- Daily 0:00 (UTC+8) for timed rebalancing judgment, rebalancing conditions for real-time leverage multiplier less than 3.5x or real-time leverage multiplier greater than 7x , or the day the target currency up or down (such as more than 1 % fluctuations, subject to the price of the contract index), the conditions are met, will be adjusted through the adjustment of the mechanism of leverage multiplier for the position to 5x.
Unscheduled rebalancing
3x ETF:
- 3x long: when leverage floats within 2.25-4.125x, no position is adjusted; when leverage breaks above the range, leverage is adjusted to 3x;
- 3x short: when leverage floats within 1.5-5.25x, no position is adjusted; when leverage breaks above the range, the leverage multiple is adjusted to 3x.
5x ETF:
- When leverage floats within 3.5-7x, no position is adjusted; when leverage exceeds the above range, the leverage multiple is adjusted to 5x;
How does the rebalancing mechanism (repositioning) work?
The actual leverage multiple of the corresponding contract positions behind the ETF will deviate from the target due to fluctuations in the price of the underlying asset. Therefore, the fund management needs to adjust the size of the contract positions to maintain a fixed leverage multiple on a regular basis.
For the sake of illustration, let's assume that the current BTC price is 100 USDT and the net value of the ETF BTC3L is 1 USDT.
Let's assume that the user buys 100 USDT of the 3x ETF BTC3L:
Initial status:
- The fund manager uses 100 USDT as margin to establish a 300 USDT position in BTC contracts on the derivatives market (leverage 3x).
Increase in the price of the underlying asset:
- If the BTC price increases by 5 %, the contract position value increases by 15 %(5 % × 3 times)
- The net value of BTC3L held by users rose by 15 %to 115 USDT
- The user's gain of 15 USDT is equivalent to the gain from the BTC 3x contract position behind it.
- Since the target leverage of BTC3L is 3x, the fund management will add a 30 USDT position to the contract, bringing the contract position value to 345 USDT (115 × 3x), restoring 3x leverage.
Similarly, if the price of the underlying asset falls, the ETF's corresponding contract position will need to be reduced to bring the leverage back to 3x.
ETF Daily adjusts leverage back to the target leverage multiple based on profit and loss, profit will be opened and loss will be reduced. Users do not need to pay margin when trading leveraged products, and can achieve the purpose of trading leverage only by simply buying and selling coins.
Note: When the fund manager adds to a contract position, contract market charges and funding rates as well as opening spreads will be depleted and Gate will charge 0.1 % of the net value of the position (currently the lowest management fee in the industry) per day as a management fee, which will be deducted directly from the ETF's NAV.
Disclaimer
The content provided herein is for reference and educational purposes only and does not constitute any financial, investment, trading, or legal advice, nor does it constitute an offer or solicitation to buy or sell any digital assets. Gate makes no express or implied representations or warranties regarding the accuracy, completeness, or timeliness of the information contained herein. Product features, interfaces, rules, and fee structures may be updated or adjusted at any time. Please refer to the latest announcements and the actual information displayed on the Gate platform for the most accurate details.
Digital asset investments involve significant risk, and prices may fluctuate substantially. You may lose the entire amount of your investment. Please make decisions cautiously based on your own financial situation and risk tolerance after fully understanding the associated risks. If necessary, you are advised to consult an independent professional financial or legal advisor.
For more information about potential risks, please refer to Gate's Risk Disclosure and User Agreement.
