Price action of 2x/3x ETF's

Discussion in 'Trading' started by Driog, Jan 27, 2009.

  1. Driog


    I have begun to notice that when i trade some of the etfs that are 2x or 3x, the price will hold at a certain price even though the market is going the other way. For example i have seen that BGZ(3x short large caps) will be going down in value when the market is going up. This is exactly what the etf is supposed to. However,at a certain point it starts to hold in a price range even though the market is still going up. In your experience does this mean that it is a good indication that the market is about to react in favor of BGZ? (i.e is this a sign that it will reverse or pullback during that period of time)

    Personally i have noticed that it seems to be the case but i unfortunately have not made written notes about it so i can only recall what i can remember.

  2. Droig, its complicated. I can speak a little for the 2x and tell you anything you want to know about the 3x.

    An ETF share represents an underlying basket of stocks - in the case of BGU & BGZ the Russel 1000 has been "optimized" down to ~385 stocks that closely track the R1k.

    When you say "the market is going up" what do you mean? Do you mean the S&P? Dow? NASDAQ? or are you following the R1k?

    Often times people will broadly look at the three major indicies (S&P, Dow & NASDAQ) and jump to a conclusion that if they are moving then the sector they are watching should be moving as well. This is not always the case - as you describe.

    Remember these things are built to track a specific index or sector only - the most common misconception IMO is with energy ETFs - they are not all built to benchmark to the crude price you see on CNBC - you have to read the prospectus and understand what the fund/ETF was built to do.

    If that didn't answer your questions please let me know where I missed the target and I'll give it another shot.