Long term bear ETFs (decay)

Discussion in 'ETFs' started by Here4money, Mar 21, 2020.

  1. Here4money


    I want to take some long positions on the bear side but have read inverse ETFs "decay" or aren't truly % point to % point inverse match to the index they track.

    Someone care to recommend or explain this to me?

    Say if I went long

    or hypothetically
    murray t turtle likes this.
  2. This graph is a good starting point.
    KCalhoun likes this.
  3. guru


    1. Inverse ETPs like PSQ, as well as leveraged ultra-short ETFs like QID were top performing stocks of 2008, meaning they went up considerably indeed:

    2. Leveraged ETFs decay due to losses compounding faster than gains.
    For example if an index drops by 10% from $100 to $90 and then recovers 11% back to $100 then the corresponding 3x ETF would drop by 30% ($100 -> $70) and then go up by 33% to $93.10, therefore not ending back at the same price where it started. Basically leveraged ETFs will lose value because they are "truly % point to % point inverse to the index they track".
    A few consecutive days down (or one big one) and the ETF can disappear with no hope for recovery, just like GUSH did just last week.
    But the compounding of gains can be very strong on consecutive days up (for the leveraged ETFs).

    (SQQQ is leveraged while PSQ is not, so they may behave differently)
    Last edited: Mar 21, 2020
    Here4money and KCalhoun like this.
  4. KCalhoun

    KCalhoun Sponsor

    Great topic..... they're not designed for long term holds; I day and swing trade them. But I just made 2k in profits holding TVIX UVXY selling them last week after holding several months.

    I used to trade SDS QID FAZ but now I trade SQQQ SOXS SPXS TVIX/VXX/UVXY.

    Remember the sec may restrict us from trading them any more, please everyone post your comment to the sec by the March 24 deadline, see www.fundcomments.com
    murray t turtle and guru like this.
  5. %%
    Good profits you made on SQQQ.
    Frankly tech tends to be so strong, so long- that maybe a tougher trade for a new trader.
    One younger trader, thought he would buy an inverse ETF because it looked so cheap, but I warned him they usually don't make money unless its a bear market...…………………………………………………………...…………………………………...……………...…....
    KCalhoun likes this.
  6. Sig


    Leveraged funds return the specified percentage (200%, 300%, -100%) of the DAILY return of the index they track. That means that if as @guru explained the index is choppy going up and down the daily return will not be the same as the long-term return if you had held 200% or 300% or been short 100% of the index. It rebalances every day. In some cases it will outperform the long-term return, in other cases it will underperform, it all depends on the path the underlying takes over that period. Best way to understand is to model it in Excel with some random and somewhat improbably price changes of the underlying, like up 10%, down 15%, up 7%...... It will instantly become clear to you what's going on. Absent the modeling it will take pages of explanation and you'll still get someone here I guarantee faffing on about "decay" which by and large doesn't exists, i.e. a 200% fund does indeed return 200% of the DAILY return of its underlying pretty closely.
  7. %%
    They tend to be reasonably/logicaly close, to the index. As Sig noted it varies. In 2019 TQQQ tended to u outperform better than 3 times QQQ. And today, PSQ did about -7.50% + QQQ about--8%-not exact numbers. PSQ is much more forgiving than a 3X ETF.

    What goofs a 3x ETF , is a year when say, QQQ gains or loses 1 or 2%. And there have been ,many years/52 weeks ,when QQQ did not do 27%-- that may happen in a day or week in this market with 3x ETFs.
    Here 4 m, almost, but did not buy some SH. last Friday, because I did not want to be holding 3X ETF, even a good downtrend can get extended/super extended.
    NEVER trade /invest money you cant afford to lose;

    Looks like some were buying PSQ + SQQQ,SDOW,...….maybe today...………………………………………………….. Hope this helps--it helped me.
  8. hafez50


    I'm speechless watching soxs (3x semi bear fund). Was $187 in dec 2018 when mkt tanked. Hit a low of $16 5 weeks ago. Went to $36 in last few days. But todays drop was just mind boggling. Hit $19 which is only $3 higher than its lows when the sox was 30% higher . Mind numbing .