If you agree that over the long term (20-30 years) the stock market will be up and that an index fund is a is a great investment tool is there any reason why the Ultra S&P ETF wouldn't be the best choice? It seeks to double the perfomance of the S&P 500, does that mean if the S&P looses 60% this ETF woudl lose 120%? Thanks for any input.
For one, the ultra ETFs do not correlate very well to their underlying index over the long run. Plenty of empical data shows that ultra ETFs barely exceed the underlying over long periods. They are good for short term extremes, and do exactly as they advertise: track double the one day range. When you compound that out, they tend to track each other equally over the long run, but with greater short term risk variance on the double ETF (think of it as swinging above and below the ETF it doubles, more variance, and more risk). They also cost more in mgmt fees, etc. than the underlying indices.
Yea, I read that also. They do a good job of doubling the performance in the short run, but not the long run - doesn't make sense to me, but I believe you. I can't believe a manager couldn't come close to doubling the performance over the long run by using margin and/or futures. Let's assume the ETF does double the performance over the long term, do you see any flaw in my theory that it would be the instrument of choice for the long term index investor? Does it hold true if the S&P is down 60% you would be down 120%?
1) To give you an idea of what it looks like over the long term. I compounded s&P500 since 2000 at both rates for 2000-present. You can get an idea of how they move over the long run by looking at this. It is not exact since I didn't include gaps, but their relative performance is correct. 2) You would go broke on double ETF and get a margin sell long before that happened. But in thoery, if ETF dropped 60% in one day, then yes, you would have 120% loss the same day. Although, since this would be unlikely in one day, for a longer period, you would have compound it out to determine the corresponding drop. Hope this helps. dtrader98 You can't see the effect of the daily differences, since only closing prices are plotted, but the daily swings are 2X as volatile on the double (i.e. double risk/reward).
The trouble with these long term is that the leverage works both ways and it takes a greater % move to get back to even. Underlying goes from 100 to 80 and back to 100 you are even. Ultra fund goes to 60 but then only comes back to 90.
agree, however, if you are going to hold these long term 10-20-30 years, its best to avg into them over time. I trade these etfs on a daily basis, I do have some for the long term and others I trade in and out of. proshares.com has good info on these and if you need more help you can just give them a call, I have, they have great help.
If you want leverage, maybe LEAPS options would do. SPY December 2010 $135 calls are around $22 now. (SPY is currently a bit under $137.)
how about the regular etfs that are not index's or leveraged such as a brazil and india etfs. Anyone got any recommendations for them?