hmmm...actively rebalancing the trade would provide an interesting wrinkle. I have been thinking through these products and trying to figure out the many ways that you can get fucked by trading them. This thought process is an important part of my risk management process. We create automated charcoal-ish box trading strategies, which hopefully one day we can scale out. Most strategies never see the big time. Ok, here are some issues I have been unable to understand regarding these etf's. Every etf represents real securities behind the curtain. The 3x long should allow the user to exchange the etf for some amount of long stock, and the short etf for short stock. (Every etf is different so please let me know if I am missing important info here.) Regarding exchanging the 3x long for stock, consider that, given the "decay", the etf can be lower today in comparison to the 1x tracking index than it was two years ago with the 1x index at the same price. Does this mean:1)that the etf redemption will result in FEWER shares of stock than it would have two years ago? If so, does this happen as a natural side effect of the rebalancing/recentering process? I am hearing that a few large hedge funds have started to arb buying the etf and redeeming the shares, when the underlying products go hard to borrow, for instance. I am going to have to go read through the product description to get my head wrapped around that one. (A similar issue hold with the 3x short, only inverse, in that it would appear that redeeming your etf for short stock would become a WORSE deal over time.) Now comes the real mindfuck. Imagine the implications for the 3x short etf, in regards to stock redemption. First off, why does the holder of long 3x etf pay the stock carry long rate? Remember behind the curtain the holding company has a huge short stock position against this etf. Most of the companies they hold are NOT hard to borrow. Therefore do they pass on the benefit of the short stock positive carrying costs to the end user? Furthermore, what in the world happens when the 3x short goes HARD TO BORROW. I went back and looked at the stock loan rate lists from Fortis and Merril for last march. The skf etf went up to being quoted at -80% carrying costs, while the underlying securities all had a very slight negative borrow, it was nothing near the etf rate. The long etf holders simply weren't loaning out their shares. My brain hurts. I need to go hire some quants to figure this out for me.