Volaltility assumes both directions (in my discussion, not a one way move). edit: assuming "only" two way moves I guess is more precise in my assumption. I think we are on the same page. Don
Got me searching for "back up" from the WSJ; Email Print Save « More . .smaller Larger By TOM LAURICELLA Exchange-traded funds that use leverage are proof positive why investors need to read the fine print. Many of these funds promise to deliver twice the return of an underlying stock or bond index -- or move twice as much in the opposite direction. So with the Standard & Poor's 500-stock index down 38.5% in 2008, a double-leveraged fund designed to profit when the S&P 500 falls would be up 77%, right? The Journal Report .See the largest stock funds and bond funds and also how fund categories stack up. Plus, see funds quotes, listed A-Z by family. The complete Investing in Funds: A Quarterly Analysis report. .Wrong. The UltraShort S&P500 ProShares rose 61%. Even more confusing, the ProShares fund designed to return twice the opposite of the Dow Jones U.S. Real Estate Index was down 50% for 2008, while the index was also down, by 43%. The issue is that these funds are designed to double the index's return -- or double the inverse of that return -- on a daily basis. The compounding of those daily moves can result in longer-term returns that have a very different relationship to the longer-term returns of the underlying index. For example, take a double-leveraged fund with a net asset value of $100. It tracks an index that starts at 100 and that goes up 5% one day and then falls 10% the next day. Over that two-day period, the index falls 5.5% (climbing to 105, and then falling to 94.5). While an investor might expect the fund to fall by twice as much, or 11%, over that two-day period, it actually falls further -- 12%. Here's why: On the first day, doubling the index's 5% gain pushes the fund's NAV to $110. Then, the next day, when the index falls 10%, the fund NAV drops 20%, to $88. The effect of compounding results in greater distortions when there are big up and down swings in the market. That's the reason the real-estate index and its double-inverse ETF were both down over the course of last year. For the most part, these funds are used by short-term traders. But they're gaining traction among individual investors who use them as a hedge in a portfolio. That's where these distortions cause real trouble. Take an investor who on Oct. 10 wanted to offset a $100,000 investment in an S&P 500 index fund by putting $50,000 in the UltraShort S&P500 ProShares. Two months later, despite big back and forth swings, the S&P 500 was pretty much unchanged. But that ETF was actually down 24% in that time frame, leaving the investor with a $12,000 loss. Don
Leveraged ETFs are rebalanced daily so there is an attrition there that takes away from the return. I was looking at FAS and how it never recovered fully after a downturn even tho the Russell 1000 had reached new highs.
What you are saying is true if there is chop or high volatility moves against you then in the LONG run you will lose money. Hoewever, as someone that FREQUENTLY uses these to swing trade I can tell you the 2x ETFs work very well!!. You just have to make sure the trend in in your direction. If not then you can be screwed. If the trend is in your direction then these vehicles are GREAT for making money fast!! You just have to limit your shares purchased so that you can withstand the volatility and still make money. I have held these for over a week before ,....and actually I just got out of them today... I make over 20% in that time frame using them. Look at EEV, SKF, ZSL, SMN in the last 8 days. Tell me these were not a good trades. SKF long on 11-10-11 @ $63.97 ZSL long on 11-16-11 @ $11.67 EEV long on 11-16-11 @ $33.44 SMN long on 11-18-11 @ $19.47 Closed all positions today.
I love all these threads and the misinformation in them. Mathematically speaking, leveraged ETFs will have a tendency to APPROACH zero but will never (ever) actually go to zero. (do the math, 50% of 1 = .5 right? what is 50% of .5 and so on) They approach zero but when you have something, unless you take away 100% of it you will never have zero. For the crash up/crash down scenarios I suggest you read the prospectus. There are stops built into the swaps where losses are covered by the inverse fund to protect the swap counter-parties. These levered ETFs are a class of 40-Act Exchange Traded Funds called "Period Beta ETFs". The leverage period for the current LETFs is 1-day. There are currently Monthly Period Beta 40-Act Mutual Funds trading and Monthly Period Beta ETFs have been filed for. (This means they will attempt to achieve the beta target (2x, 3x, etc) at the end of a month vs. a day. This will add great complexity to the pricing, hedging and intra-period performance of the products. As for the reverse splits - to be technical, we purchase shares in the secondary market. When there is a reverse split the secondary shares are destroyed and new shares are issued (as well as a new CUSIP) so technically speaking the value of a share of an ETF can only be pegged to the inception date of that share (the issue date after the split). That's probably too complicated for most, but it is still true. (doesn't change the fact that the split-adjusted prices still skew the initial offering price higher and higher because they calculate it incorrectly. An ETF is priced based on its underlying so as long as you have a way to tie the underlying back to the secondary market trading price (what we see our bids & offers on the exchanges posted at) then it doesn't really matter whether the ETF trades at $1 or $100. They are not to be taken lightly. The 3x products decay a lot.
We started making good money the "natural" way... selling short both long and short 2x and 3x ETF's. Working really well... but very (very) Costly to carry. The cost of carry and borrow finally passed the profit line, and even with, what some may consider "massive resources" - it simiply became a no win situation. Never long of course, and carry costs cut the time decay. Oh well, back to the easy stuff (as if, LOL). Enjoy the weekend everyone... Don
FYI - they changed the holdings and underlying of these things - for example TNA & TZA are no longer buying swap on the Russell 2000 - they buy swap on IWM. They are essentially fund-of-funds. They still have the same investment objective however they behave very differently.
" leveraged ETFs will have a tendency to APPROACH zero " Then we can short a double up EFT and a double down EFT at the same time;and our account value has a tendency to infinity?