shorting triple leverage ETF pairs for deterioration

Discussion in 'ETFs' started by theFarmer, Apr 4, 2012.

  1. theFarmer


    there are several articles and videos out there demonstrating the slow deterioration of 3x ETFs like FAZ and FAS. there have been random times that direxion issues special dividends to offset this deterioration but I just wanted to ask: has anyone experimented on these short positions successfully?
  2. Too high cost of carry.
  3. New here. Just posted that these leveraged ETF's have a high cost to carry.
  4. you can find reasonable carry costs, on some,
    UMDD/SMDD for example,
    but I found the daily rebalancing to eat away at profits.

    It's possible that I just picked the wrong ETFs,
    at the wrong time.

  5. What carry costs are you talking about? I short FAS/FAZ or whatever and I earn interest on the money I receive from short until I close out the position.
  6. Brokers aren't even paying interest on cash balances.

    So, how are you earning interest from short sales proceeds?
  7. sle


    Carry on a position like this would consist mainly of the borrow cost. On reverse/levered ETFs the borrow is significant.
  8. I see borrow costs at IB of 20-40% all the time...
    The short borrow cost on these ETFs...
    Should go high enough to eliminate the arbitrage.
  9. sle


    Oh yeah, for sure. Assuming a regular log-normal model for the underlying, here is a quickie model:
    etf return = spot return^leverage * exp(drift term)
    drift term = (1-leverage)*rate*time - (borrow + management fees) * time - 0.5 *(leverage^2 - leverage) * variance * time
    You can easily solve for a break-even borrow.

    In fact, I recall calculating that if your broker actually passes the borrow rate on to you (which IB might not), you might be better served by being long these things against the benchmark. It would be an easy way to short some volatility and have some tail protection.
  10. I am confused with ETF cost and re balancing, could anyone help to clarify the following?

    1. Suppose you bought FAS at beginning of the year at $66, and yesterday's close is $104, then your profit is $104-$66=$38, after re balancing, do you still have $38 profit in your account or not? Or you just have $28 left?
    2. Would you short 200 shares of FAS at $100 or buy 1000 shares of FAZ at $20?
    3. If you short 100 shares of FAS at $100 and hold for 5 days, what is the cost about from IB? Just a close estimate please.

    Thank you so much.
    #10     Apr 6, 2012