Hedge funds have recently increased their investment in aggressive, exchange-traded funds.

Typically, ETFs are low-cost, conservative investment vehicles, but leveraged ETFs prove to be riskier, providing twice the rise or fall of the tracked index. A rise in investment of aggressive ETFs is due, in part, to conservative lending patterns by banks.

Varieties of funds and firms are investing in leveraged ETFs. Long-only money managers, hedge funds managers looking to get away from individual stocks and other fund managers trying to get around limits on borrowing are all investing in leveraged ETFs.

Rather than making anticipations on the falling prices of oil, mutual funds are buying leveraged ETFs to circumvent their energy holdings.

Because leveraged ETFs are more volatile, they are riskier, leading to either larger gains or larger losses for their investors. Reviewing two ETFs within the ProShares ETF group demonstrates the success and failure of leveraged ETFs in the past year.

ProShares UltraShort Oil & Gas ETF, which tracks an index of energy shares, provides twice the inverse of index movement and has been very popular within hedge funds.

Energy shares have increased substantially, hurting this ETF as it declined 45% over the past year. Despite these numbers, investors have pumped $2.5 billion into this ETF so far this year. The ProShares Ultra Short Financials ETF, which doubles the Dow Jones Index, has increased 90% in the past year.

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