Will FAS "erode/decay" away?

Discussion in 'ETFs' started by J. Shi, May 18, 2009.

  1. J. Shi

    J. Shi

    Because of the mathematics behind the 3x leveraged ETF, FAS will decrease at faster rate than it can increase over the long run (over several weeks/months because of the interday gaps in price). Thus it doesn't track the true performance of the Russell 1000 Financial Index, but only the daily performance. With this in mind, does that mean FAS has a significant probability of being reduced to a penny stock at the next big stock market downturn? And if so, what does this mean for the future of the ETF?
  2. m22au


    1. Yes, it will erode over time.

    2. What happens when the ETF goes below (insert low price here) is up to Direxion. The exchanges also have rules about the ongoing listing of low priced stocks.

    Often stocks do reverse splits when they maintain a low price.

  3. I don't think FAS is the only leveraged ETF with this issue, is it? You could say the same thing for FAZ, SSO, SDS, etc./.. no?
  4. crazy that they both started @ 60 and now both under 10, i guess guaranteed profit on a short if you can sustain a drawdown the size of the grand canyon
  5. m22au



    The FAS/FAZ pair win the prize for the worst performance.

  6. m22au


    Guaranteed, if:

    (1) your short position does not get bought in

    (2) As you mentioned, that you able to cope with a drawdown if one of the pair goes up by a lot (eg. FAZ went above 200 in November 2008)

    (3) Other factors that I have not considered

  7. Actually Direxion was considering a reverse split of some of its ETFs a couple months ago, and FAS below 2.50 on march 6th reinforced it, however the big bull changed their minds, at least for right now.

    Some people do hold FAS for a while. My couson got it at $4 and recently sold it around $10, about a month ago durig the first almost $10 spike.
  8. zdreg


  9. hedgex


    FAS went from 2.7 in March to 12 in May. You will need enough capital to sustain the loss on shorting.

  10. plan


    Eventually FAS FAZ will both be penny stocks. Just a matter of time.
    #10     May 19, 2009