Levered ETF's--Portfolio Salvation or Damnation?

Discussion in 'ETFs' started by marketsurfer, Dec 23, 2008.

  1. Ran across this article on yahoo explaining the rise of levered ETF's. good reading!


    Levered ETFs, those highly relatively volatile instruments have become hugely popular over the last year. Internet discussion forums and anywhere investors gather are buzzing with questions and opinions regarding these relatively new trading tools.


    Popular opinion runs the gamut from dire warnings of ones portfolio being quickly chopped to pieces by their use to rave reviews on how these tools were used to quickly grow profits and saving ones account. The truth lays, not in the tools themselves, but how they used. It is akin to comparing an axe to a chainsaw. The axe is dangerous in the wrong hands, but not near as hazardous as a chainsaw in untrained hands. The axe will do the same job as the chainsaw, albeit slower and with more effort. However, when operated by a trained, careful and cautious user, the chainsaw will produce tremendously greater results along with safety than the axe. Levered ETFs are the chainsaw of the ETF world. This article will explain levered ETFs and provide a basic understanding on how they can be safely used to enhance portfolio performance.

    Levered ETFs, introduced in 2006, are Exchange Traded Funds that provide greater than one to one exposure to the underlying index. The exposure is generally 2 times however 3 times levered ETFs have been recently launched. It is important to note that it is 2 or 3x the daily movement of the underlying and not 2 or 3X levered the yearly gains/losses of the index.

    In addition, ETFs marketed as 3x are generally only actually 2.5x levered. In other words, for every point the underlying index



    Ultra Short Dow 30 (NYSE:DXD - News), Ultra Short QQQ (NYSE:QID - News), Ultra Gold (NYSE:UGL - News), Ultra Euro (NYSE:ULE - News), Rydex S&P 500 (NYSE:RSU - News) and Rydex Russell 2000 (NYSE:RRY - News). Examples of 3x leveraged ETFs includea S&P 500 Bull (NASDAQ:DXSLX - News), Nasdaq 100 Bear (NASDAQ:DXSSX - News), and Small Cap Bull (NASDAQ:DXRLX - News).

    I am certain many of you are asking just how these ETFs achieve leverage of this magnitude. Without going into complex fund construction mathematics, simply stated, it is done with a mixture of options, index futures and swaps to achieve the desired results. Unfortunately........... EDIT EDIT



  2. seauouch


    I've been trading FAZ, FAS & SRS the last few weeks. These ETFs are portfolio destroyers for people dumb enough to buy & hold them but are quite nice to trade intra-day. I dont like to hold the ultra shorts through the close & refuse to hold the ultra longs over night, my thinking the odds of horrible news coming out AH/pre market is one hell of alot better than any kind of good news coming out anytime soon.

  3. Yes, makes sense. thanks

    good luck!

  4. I read both his articles and found them lacking. Yes, there is an anomaly in the returns of the SRS and SKF. Unfortunately, this ex-GS MD basically pointed that out, failed miserably to explain why it occurred, then launched into some kind of crazed rant against the products.

    After carefully reading his article, I still don't understand why they don't track the indexes. He mentions two things, one, the fact that it takes a greater percentage rise to offset the same percentage loss, and two, the fact that these ulta short funds are a negative vol position. Other than state this, he never attempted to prove that these accounted for the disparity in returns. So we are left to wonder.

    I would love for RM to follow up with a rebuttal by someone from ProFunds. It's a serious issue and deserves a more rigorous examination. One thing is for sure though. Use them for daytrading, not as a portfolio hedge.
  5. RAY


  6. Brewey


  7. RAY


    Yep. The Tax Man commith.
  8. Brewey


    Wow...I was really hoping I was missing something like an odd and unnecessary awkward split. This is true criminality...worse than the Tax Man, as tough as that is to beat.
    #10     Dec 23, 2008