Is it easy to short Leveraged ETFs ?

Discussion in 'ETFs' started by 0008, Jan 31, 2012.

  1. 0008


    Is it easy for brokers to borrow Leveraged ETFs for us?

    Any comments are welcome.
  2. rmorse

    rmorse ET Sponsor

    Most can be borrowed. You will require a locate on any of them, not on the easy to borrow list. Most require locates and have negative interest rates. If you're just day trading, you only need the locate. The negative interest rate is not an issue.

  3. 0008


    What are the usual "negative interest rates" for them? If I shorted the FAS at 114.7 half year ago and cover it now at 78.45, how much would I need to pay?
  4. rmorse

    rmorse ET Sponsor

    I'm not sure, but last I looked it was -7%. But that was last summer. The rate can change everyday.
  5. Many levered ETFs have an inverse levered ETF available too. Like the FAS and FAZ for example. Why short the actual ETF just out of curiosity?
  6. You would want to short the double or triple long in stead of going straight double or triple short because the NAS degrades in these types of ETFs. The fees associated with the ability of going 2 or 3 times in one direction adds up over time.

    Put another way, if you start with a stock value of $10 for both a triple long and short (both adding up to $20), then check back 1 year later, not matter which direction the market went, adding up the stock value of both the short and the long will usually result in a value much less than 1 year ago ($20 in this example).

    I was wondering myself if you went short BOTH the triple long and triple short at the same time, would the degradation in the NAS cover the cost of shorting both of these? In this scenario, you would run the risk of the stock being called back at some point. Also, if the market runs hard in one direction for a prolonged period of time, this is the one scenario when this type of trade doesn't work, and you will need margin to hold on until the pattern reverses.

    Any thoughts on this would be welcome.
  7. C99


    for most people, if you can even get a locate, the cost to borrow is going to be very close to any profit to be had from the trade. good concept to understand but a few yrs too late to be profitable.
  8. sf631


    @churchill I did this exact trade a few years ago. logistical nightmare having to rebalance the sides daily. Profits were minimal and you're exposed to a black swan event (if markets drop by 25% in a day, the 3X long will go against you greater in dollar terms than the 3x short will go for you (asymptotic approach to zero)

    Summary, lots of headache, minimal reward
  9. Thanks for your input. I guess sharp moves in one direction or prolonged smaller moves in one direction can throw a wrench into this strategy. Plus as you mention the rebalancing is difficult. Maybe rebalancing every week or two instead of every day might make is easier, but I suppose you would temporarily be exposed the portion of the position that is out of whack.
  10. sf631


    Yeah, I'm not a nut about perfectly hedging, believing that it all comes out in the wash eventually, but with a pair of 3X levered ETFs and a 2% move, one fund will go up by 6% and the other down by ~6% meaning you're net 12% out of balance in *one day*. You're always out of balance in the direction that hurts you if the move continues in that direction so a couple of days in a row with 2% moves in the same direction and you can be pretty seriously hurt.

    I used to rail against the flaws in levered/inverse ETFs because of their propensity to price decay over time, but have since come to understand that they just have a certain level of "option premium" built into them. Long an inverse is like being long a put. You pay a certain option value premium to have the certainty of limited downside and unlimited upside. Just like options, this certainty comes with a cost. Whether you want to pay the premium (be long the leveraged/inverse etfs) or collect the premium (be short) depends on your disposition and risk profile
    #10     Feb 22, 2012