Shorting Leveraged ETFs

Discussion in 'ETFs' started by Rooster1, Feb 15, 2013.

  1. Rooster1


    As I understand it, leveraged ETFs have moderately large fees associated with them that are somehow worked into the pricing over time. Not quite sure how those fees are worked in over time, but I understand the fees to be around 0.9% per year. So holding a long position for a year in a leveraged ETF reduces one's return by 0.9% over the course of a year. Then, if I understand that properly, would shorting a leveraged ETF not reverse that 0.9% fee, such that shorting a leveraged ETF for a year would result in a 0.9% premium to the short position holder of the leveraged ETF?

    Follow up question, using this *hypothetical* example of these two mirror image leveraged ETFs:
    TNA- a Russell 2000 3x Bull ETF
    TZA- a Russell 2000 3x Bear ETF
    If one were bullish on the Russell 2000, would not it be better to short the TZA rather than invest long in TNA, since over the course of a year going long on the TNA would cost 0.9%, but shorting the TZA would actually increase return by 0.9%, a 1.8% differential between the two equivalent investments.
  2. Rooster1


    two days ago I had three replies to my topic post, now they are gone, what happened?
  3. sorry but there's no free lunch, these things are first of all difficult to find short shares and secondly very expensive to short. more then completely wiping out your "free" 0.9%.
  4. I got the impression that if the borrow fees didn't get you that the costs to rebalance would.
  5. RedSun


    Most of the leveraged ETFs have the opposite leveraged ETF, such as TQQQ vs. SQQQ, etc.

    I never find the need to short any ETF.
  6. It doesn't seem like entirely understand the dynamics of this trade to be honest.

    The 'fees' you're referring to have to do with daily rebalancing in order for the issuer to retain some constant delta. The fees only really add up when the associated delta 1 ETF is in a state of mean-reversion (they buy high and sell low). That simple fact ties shorting a levered ETF and hedging it to vol trading.

    In fact the payoff of such a strategy becomes similar to delta-hedging strategy (or a straddle). There are a few differences in exposure though.

    Like another poster had mentioned though.. it'll be difficult to make any money due to the short rebate.