first was that DIG and DUG both went down big. Now a new question, QLD is 2X QQQ, now is 27 QQQQ is 30 If QQQQ goes to 15, will QLD become a negative number? Do I have to pay my broker money? It does not add up. Can someone explain that to me?
That presentation does not properly explain compounding with regards to exposure. Leveraged ETFs do not have variable leverage points, he is incorrect with regards to Proshares and Direxion ETFs which he uses as examples (roughly 23 minutes into the presentationo through the 30 minute mark) I do like how he discourages long term holding and encourages short term trading but his presentation on compounding and fund exposure and leverage is horrible.
The points of that presentations is that ETF is a trading tool, not a suitable investment vehicle. Would you kindly explain where he made erroneous accusation on compounding errors involved with ETF?
Number, Watch 26:20 section on leverage. âI also want to preface this by saying this is probably not how it is actually done with a fund but the idea is the sameâ Portfolio Managers of these leveraged funds rebalance the portfolios daily â to keep them in line with the positive or negative performance of the index. If the index goes down and you lose capital, the borrowed exposure is sold down so that the borrowed amount proportionally matches the capital amount â and the NAV is adjusted to match the performance of the fund for that day. At 28:22 â he says âthe value of the investors money has not changedâ â incorrect â your capital/money moves with the index and leverage just as the borrowed money does. What the presenter is incorrect about is compounding and gains/losses. It is very important to rebalance your portfolio because you have unrealized gains that are compounding your exposure. The additional leverage that he claims the shareholder has is not additional leverage â it is unrealized gains, which is your money⦠so your investment increases and decreases proportionally with the move of the index as does the debt.
If i remember correctly, the presenter says the volatility can cause serious damper to this kind leveraged ETF's performance long term, because they have to rebalanced their portfolios frequently, plus additional expenses to manage which exacerbates problem of compounding errors. Of course, in ideal linear situation, this kind leveraged ETFs, especially the bear side should perform close to its bull side. However, it didn't in real life long term. On short term it does closely, but not exact. Anyway, I didn't do exact math with his number; but I tend to agree with his concepts or idea about leveraged ETF,which involved not just equities but many derivatives, such as options and futures, these things bring in counterpart risks.