Shorting GOLD with GLL

Back on July 24th, 2011 I bought into GLL, which is (supposedly) double the inverse of gold.

Gold was about 1578 / oz then. Today, as gold drops to 1500 / oz, my GLL ETF is still -20% off the price that I bought it at.

Anybody know why this happens? Unfortunately, I assumed that GLL was tightly coupled to the inverse of gold, and now I am paying for it

 

You need to read up on leveraged ETF's. They have horrible tracking because of the daily rebalance component.

These do not track well beyond a few days....

 

yeah, just did read up on a few...still doesn't make sense to me...if it tracks it, it should track it

what should I have done if I wanted to short gold? the catch is that I could only use an ETF, and I couldn't short because it was in a IRA account.

 

Why not buy GLD puts?

 

all levered short ETFs will eventually decay towards zero given enough time. this does not necessily make them a bad instrument or a good short, however

 

"Despite years of warnings about the dangers of "leveraged" exchange-traded mutual funds, many small investors—and, apparently, some investment professionals—may still not be getting the message.

Morgan Stanley was fined for improperly selling leveraged ETFs.

Earlier this month, the Financial Industry Regulatory Authority fined brokers including Citigroup Global Markets, Morgan Stanley, MS -4.35% UBS Financial Services and Wells Fargo Advisors for improperly selling leveraged and inverse ETFs.

A Citi spokeswoman said in a statement the company is "pleased to have this matter resolved." The other firms said in separate statements that they have bolstered their supervisory procedures since the violations occurred in 2008 and 2009.

Leveraged ETFs seek to magnify the performance of the indexes they track—for a single day. Inverse ETFs try to achieve the opposite performance.

For example, the ProShares Ultra S&P 500 SSO -2.21% exchange-traded fund seeks to deliver twice the daily performance of the Standard & Poor's 500-stock index. If the index rises 1% in a day, the ProShares ETF should rise 2%; if the index falls 1%, the ETF should fall 2%.

But while leveraged ETFs can be useful in some situations, they are expensive and can be harmful to small investors who hold them for longer than a day, say advisers and researchers who have studied the products.

"The long-term investor has no need to be in these products at all," says Rick Ferri, founder of Portfolio Solutions, an investment adviser in Troy, Mich.

When the ETFs launched in the mid-2000s, many small investors looking to pump up their returns missed an important wrinkle. Because of daily compounding, long-term investments in leveraged ETFs don't mirror the indexes the funds tracked.

For example, ProShares Ultra S&P 500 lost 0.83% on Tuesday, about double the loss of the S&P 500. But over the past five years, the ETF has lost about 9% annually, and the index has been flat.

All told, there are 275 leveraged and inverse ETFs with nearly $33 billion in assets, according to tracker IndexUniverse. The biggest, as of this past week, included Direxion Daily Financial Bull 3x, FAS -5.63% with nearly $1.4 billion, ProShares UltraShort 20+ Year Treasury, TBT -2.77% with $3.4 billion, and ProShares UltraShort S&P 500, with just over $2 billion.

The ETFs are used mainly to make extremely short-term bets or to temporarily hedge market exposures. Such activities are best left to big institutional investors, Mr. Ferri says.

Leveraged ETF providers make the risks clear on their websites and in prospectuses—in some cases warning that holding the ETFs for longer than one day will result in losses. Before those disclosures, many investors and some advisers held them for months at a time, Mr. Ferri says.

The daily compounding issue is magnified during periods of high volatility. In 2011, an investment in the ProShares ETF would have lost nearly 3%, even though the S&P 500 gained more than 2%.

What's more, the products are expensive, notes Jeffrey Bogart, a registered investment adviser at Bogart Cunix & Browning in Mayfield Heights, Ohio. Direxion Daily Financial Bull 3x, which tries to triple the daily performance of the Russell 1000 Financial Services index, has an expense ratio of 0.95%. ProShares Ultra S&P 500 costs 0.92%. ETFs that track major indexes without leverage can cost 0.1% or less.

Even after accounting for the compounding issues and costs, during periods of high volatility some leveraged ETFs still fail to perform as expected, says Pauline Shum, director of the Master of Finance program at the Schulich School of Business at York University in Toronto.

It is difficult for retail investors to calculate the net asset value of the contracts that underlie the ETFs, and in the past, leveraged ETFs' share prices have deviated significantly from the value of the underlying assets, Ms. Shum says.

"When things are out of whack, the market becomes temporarily inefficient," she says.

Other research has shown that leveraged ETFs might lose several percentage points of return from the costs incurred to maintain the leverage. Leveraged-ETF providers have to rebalance their portfolios daily to keep the proper amount of leverage, says Marco Avellaneda, a professor at New York University and a partner at Finance Concepts, a risk-consulting firm.

Leveraged ETFs' mandates are publicly known—that is, a leveraged financial ETF needs to own the assets and derivatives necessary to double the index's return. Prof. Avellaneda's research has shown that when ETF providers try to execute the trades needed to support the ETFs, they get poor prices for the contracts and assets they have to buy.

Prof. Avellaneda says that might be because of their publicly known mandate, or because the orders they execute are so large, among other reasons. The result can be a hidden cost of as much as five percentage points of return annually, according to Prof. Avellaneda.

"If you know I'm the leveraged-ETF guy, you know which side of the trade I have, and that's going to move your asking price up," he says.

With all that in mind, there are almost no circumstances in which a small investor should trade leveraged ETFs, says Mr. Bogart: "It's asking for trouble."

 

dude think about it....

you start with $100
Gold starts at $100.

day 1 gold down 10%, you up 20%. $120.
day 2 gold up 10%, you down 20%. $96.

gold at $99.
You at $96.

rinse, repeat and you always lose. daily inverses ALWAYS lose the longer you go. common sense man, c'mon.

 

I've always wondered if it would make sense to short both bullish and bearish 2x ETFs. (Equal $$$) and perhaps rebalance once in awhile if you are ahead of the game.

In theory they should both decay and you would capture the difference.

Say you take a short position $10K worth of SSO and $10K worth of SDS, hold it for a year, at the end of the year you rebalance it, so that the positions are equal again.

I'll have to experiment with this idea on paper.