So I'm completely confused as to everybody's position on this. If SPY and a 3X ETF SPXL both start at 100... Day 1: SPY: 100 | SPXS: 100 Day 2: SPY: 101 | SPXS: 103 Day 3: SPY: 100 | SPXS: 99.94059406 I am confused as to what everybody's definition of "decay" is, but I thought that this devaluation represented exactly what it was, a phenomena removed from options, futures, or fees, or definitions. It seems inherent in the mathematical function that controls a leveraged ETF.
Leveraged ETF's = buying daily short dated option premium with high time decay. You need a big move to be compensated. I would hope you have learned your lesson with small fee in little loss.
That is an fundamentally and completely incorrect assertion. A leveraged ETF does not have theta and pretty much doesn't behave as an option in any way.
The short answer is they trade like options and below is the long detailed explanation. A trader would use them for a day and not a year if compelled to play. The Bottom Line Leveraged ETFs, like most ETFs, are simple to use but hide considerable complexity. Behind the scenes, fund management is constantly buying and selling derivatives to maintain a target index exposure. This results in interest and transaction expenses and significant fluctuations in index exposure due to daily rebalancing. Because of these factors, it is impossible for any of these funds to provide twice the return of the index for long periods of time. The best way to develop realistic performance expectations for these products is to study the ETF's past daily returns as compared to those of the underlying index. For investors that are already familiar with leveraged investing and have access to the underlying derivatives (e.g. index futures, index options, and equity swaps), leveraged ETFs may have little to offer. These investors will probably be more comfortable managing their own portfolio, and controlling their index exposure and leverage ratio directly.
No, they don't trade like options and they don't have "high time decay", also known as Theta for those who trade options. In general if you look at the returns they provide exactly 2x or 3x or -1x the daily return of the index. If you rebalanced them daily, you'd get exactly 2x or 3x or -1x the index return. Most people don't rebalance daily, which leads to path dependent returns because of the daily return feature of the fund. If you read this entire thread and many like it you'll see me explain this ad nauseam in excruciating detail with examples. Options do not behave in this manner. At all. Imagine you buy an OTM option on an index trading at $100 and pay $3 for it. At the same time, you buy an equal amount of a 2X ETF tracking the same index. The underlying index remains flat until the option expires. You lost your entire option premium (that's your theta). You lost $0 in the ETF (it doesn't have theta!). That's a hell of a difference! OK, nothing ever stays flat, let's say you bought the same position and the index fell by 5%. Your option position again lost 100% and your ETF lost around 10% I say around 10% because it depends on the path by which the index ended up down 5%. It's actually possible that your 2X fund only went down 7%, or it could have gone down 12%, or it even could have gone up 1%! Again the behavior is nothing like an option. You've got it in your head that leveraged ETFs "decay" when they do no such thing (or you're vastly oversimplifying to the point of leading people astray). The majority are actually invested in notes from several investment banks that provide a return equal to the multiple the fund is supposed to return, so there is nothing there to decay (these aren't even the ETNs, look at what the ETFs are invested in). I know of very few that invest in options at all, most invest in futures and have funds on both sides of the leveraged play so they simply swap positions between them and suffer miniscule roll costs if any. Repeat after me, a leveraged ETF is not an option!
we are talking about holding the 3x etf for weeks to months or even over year, them there is decay as long as it doesnt go to one direcrion almost every day. The advantge is if it goes to one direction almost everyday it would be over 3x, even 4x is normal. Of course if you bid the wrong direction you would lose more than 3x too if that bid wrong direction for many days. the decay is also from contango if you buy bull 3x and it is big decay for oil related etf. Market in lomg term should be like 80% of the time contango. The worse is uwti and dwti will be not in exchange soon.
both dwti and uwti drop around 50% in one year period, how can you explain it without using the decay?
I specifically demonstrated, to you, in this very thread!, that leveraged ETFs don't decay, they simply suffer path dependence which leads to unexpected results. At this point I believe the concept is simply beyond your grasp, I know that's an A-hole arrogant thing to say but I just can't think of any other explanation.