I hear about "time decay" being the enemy of these leveraged ETF's, because of negative compounding... But wouldn't it be the other way around if you are "profitable"? e.g. Compounding on your gains? In other words, is it bad to hold on to a leveraged ETF even when your gaining? Wouldn't you WANT TO compound your gains?
Yes, gains compound so a 2x ETF can actually increase faster than 2x the Index if your timing is right. No, it's not bad to leverage a winning position. Yes, you would want to compound and hold your gains, while the trend continues. For example, if you had bought SSO (2x S&P etf), on April 1st, 2009 (almost perfect timing) and held until today, you would be up +565.3%, which is more than 2x SPY's return during that time. SPY is up +196.5% from that same date.
That's what I was thinking myself... But apparently there's some examples out there where long term these leveraged ETF's earn less (which is obvious because if you "leverage" (eg. compound) losses then it takes exponentially more gain to make up for that negative compounding (if that makes sense).
Reposting my message from http://www.elitetrader.com/et/index...is-not-a-fair-game.298324/page-2#post-4256336 : I don't fully understand the math, but I recommend checking out pages 1-11 of Jian Zhang's 2010 PhD thesis, "Path-Dependence Properties of Leveraged Exchange-Traded Funds: Compounding, Volatility and Option Pricing" at https://www.math.nyu.edu/faculty/avellane/thesis_Zhang.pdf , especially equation 2.1.4 on page 10, which attempts to predict the price of a leveraged ETF after many rebalancing periods, given certain statistical assumptions about the movement of the underlying.
toonerdy, thanks for the link. Here is another article that is worth a look.... http://ddnum.com/articles/leveragedETFs.php
Wow these links are beautiful, thank you so much Ill give them a read! If you look at some of the leveraged ETF's following the S&P 500, you can see that they have incredible gains of 150% over 5years. This leads me to conclude that not ALL leveraged ETF's are bad over longer time frames.
%% Exactly right T-on; but make sure you have a good trend or pretty good trend + selling plan, because who wants to lose2or 3 times faster .....???. Dont panic when the compliance chief sends you a mass mailing, on 2 or 3 X ETFs.Probably a lawful requirement-NOT trading/investing advice
Correct but that's true of ANY investment, not just leveraged ETF's... It's just fundamental math and it applies to anything.
That's where I think most people dislike these, of course on the flip side you could gain 2 or 3x faster I just see it as no different as using margin, and perhaps even better as borrowing usually includes very high interests.