What is the Rebalancing Mechanism?
When the price of the underlying asset fluctuates, the leverage ratio of an ETF leveraged token changes. To maintain a fixed target leverage ratio, periodic reallocation of the underlying asset contracts is required.
Rebalancing refers to adjusting the proportion of different assets in an investment portfolio. In the context of Gate’s ETF leveraged tokens, rebalancing means that the fund manager adjusts the perpetual contract positions corresponding to the ETF leveraged token.
The specific rebalancing method involves tracking and maintaining the fund’s leverage ratio daily based on market fluctuations. At a fixed time each day, the fund’s assets are settled, and the required leverage amount is recalculated based on the adjusted net asset value of the fund, ensuring the closest possible tracking of the target leverage ratio.
How Does the Rebalancing Mechanism Work?
Due to price fluctuations in the underlying asset, the actual leverage ratio of the contract positions backing ETF leveraged tokens may deviate from the target ratio. Therefore, the fund manager must periodically rebalance by adjusting the contract position size to maintain a fixed leverage ratio.
To illustrate, assume the current BTC price is 100 USDT , and the net asset value (NAV) of the BTC3L (3x long BTC leveraged token) is 1 USDT .
Initial State:
- A user purchases 100 USDT worth of BTC3L (3x leverage).
- The fund manager uses 100 USDT as margin to establish a 300 USDT BTC contract position in the derivatives market (3x leverage).
| BTC Price (USDT) | BTC3L NAV (USDT) | BTC 3X Contract Position (USDT) | BTC3L Actual Leverage |
|---|---|---|---|
| 100 | 100 | 300 | 300/100 = 3X |
Price Increase Scenario:
- If BTC price rises 5% , the contract position value increases by 15% ( 5% × 3X ).
- The user’s BTC3L NAV increases by 15% , reaching 115 USDT .
| BTC Price (USDT) | BTC3L NAV (USDT) | BTC 3X Contract Position (USDT) | BTC3L Actual Leverage |
|---|---|---|---|
| 105 | 115 | 315 | 315/115 = 2.74X |
Since the BTC3L actual leverage ratio ( 2.74X ) is below the target 3X , the fund manager increases the contract position by 30 USDT , bringing it to 345 USDT ( 115 × 3X ), restoring the leverage ratio.
| BTC Price (USDT) | BTC3L NAV (USDT) | BTC 3X Contract Position (USDT) | BTC3L Actual Leverage |
|---|---|---|---|
| 105 | 115 | 315 + 30 = 345 | 345/115 = 3X |
Similarly, when the underlying asset price declines, the ETF leveraged token’s contract position is reduced to restore the 3x leverage.
ETF leveraged tokens automatically adjust their leverage ratio daily based on profits and losses. If there is a profit, the fund manager increases the position; if there is a loss, the position is reduced. Users do not need to provide margin when trading leveraged tokens—simply buying and selling tokens achieves leveraged trading.
Important Notes:
- When increasing contract positions, market fees, funding rates, and order book spreads may lead to some slippage.
- Gate charges a daily management fee of 0.1% of the net asset value , which is the lowest in the industry. This fee is directly deducted from the ETF leveraged token’s NAV.
Gate ETF Leveraged Token Rebalancing Rules
Gate’s ETF rebalancing mechanism includes Regular rebalancing and Irregular rebalancing .
3x ETF Leveraged Tokens
Regular rebalancing
- Conducted daily at 16:00 UTC .
- Rebalancing is triggered when:
The real-time leverage ratio falls below 2X or exceeds 4X or the daily price movement of the underlying asset exceeds 1% (based on contract index price).
If the condition is met, the leverage ratio is adjusted back to 3X .
Irregular rebalancing
- The real-time leverage ratio exceeds 4X.
- If triggered, the leverage ratio is adjusted back to 3X .
5x ETF Leveraged Tokens
Regular rebalancing
- Conducted daily at 00:00 UTC+8 .
- Rebalancing is triggered when:
The real-time leverage ratio falls below 3.5X or exceeds 7X or the daily price movement of the underlying asset exceeds 1% (based on contract index price).
If the condition is met, the leverage ratio is adjusted back to 5X .
Irregular rebalancing
The real-time leverage ratio exceeds 7X.
If triggered, the leverage ratio is adjusted back to 5X .
