ETF Bad Boys: Kings or Paupers of investing?

Discussion in 'Educational Resources' started by thisisnotsurfer, Feb 23, 2010.

  1. Anyone trade these bad boys of the ETF world?


    Why would a trader use these types of products? As you can imagine, the returns have been shocking in both directions this year. One of the bullish domestic index funds is down over 80% this year and, as you can expect, the bearish domestic names are up over 100%. The simplest reason traders would add these products to their portfolio of tools are to magnify gains when speculating in the market. Less capital goes further, more bangs for your buck, so to speak. However, it's critical to ALWAYS keep in mind that this kind of leverage, or any leverage for that matter, is a two edged sword. You can lose just as fast as you can win when trading these volatile products. Several of the other reasons tripled leveraged ETFs make sense include:

    Hedging - Purchasing tripled leverage ETFs inversely correlated to your holdings will allow you to correctly hedge against adverse moves with less capital outlay than hedging with less levered instruments.

    Portable Alpha - This hedge fund sounding strategy is simply adding diversification while maintaining the same exposure. Leverage is utilized to free up capital with the proceeds invested in non correlated investments to decrease volatility. The tripled Levered ETFs are ideal tools for this goal.

    Long Short Relative Value - A great tactic to use to smooth volatility in your portfolio. The concept is similar to pair trading where a long position is taken in the ETF that is believed to be headed up, and a short position placed in an ETF thought to be heading downward. The tripled leverage ETFs allow this strategy with less cash outlay for the same exposure.