ETF description types

[Nate]

I thought I remember seeing a thread here someplace describing all the lingo on ETF funds.... Short, Ultra Short, short bears, closed end, 2X, 3X, etc. Cant seem to find it now. Am I losing my mind? :huh: If so, I'll research it all on my own unless someone has a good link

[XL-entLady]

I thought I remember seeing a thread here someplace describing all the lingo on ETF funds.... Short, Ultra Short, short bears, closed end, 2X, 3X, etc. Cant seem to find it now. Am I losing my mind? :huh: If so, I'll research it all on my own unless someone has a good link
Sounds like some of the threads in the "Investing in ETFs" or the "ETF Trading" subforums.

If skimming those subforums doesn't help, try doing a word search maybe? If you're just looking for a good beginner article or two, I'll try to look around and point you in the right direction. :)

[etftalk]

Maybe here?

http://www.etftalk.com/forum/showthread.php?t=288&highlight=ultra

[Nate]

That link has some good stuff. I'll keep looking around here when ive got more time, and if no-go, then I'll lok around the net. Maybe I saw it somewhere else & just thought it was here. Mainly I just want to learn the differences from regular funds, short, long, 2x, 3x vs regular, etc. etc etc.

[etftalk]

I probably can't give a good description, but I can give the basics.

The longs are obvious, they go up when the vehicle they track go up.

The shorts go up when the vehicle they track go down.

The 2X and 3X are leveraged meaning they are supposed to go up or down twice or 3 times that of the vehicle they are tracking.

There is a lot written here about those leveraged ETFs and they can be tricky because of the daily valuations. I will try to find a link.

[etftalk]

There is a lot written here about those leveraged ETFs and they can be tricky because of the daily valuations. I will try to find a link.
Here it is... http://www.etftalk.com/forum/showthread.php?t=430&highlight=leveraged

[peterson82]

That's an old thread. I believe the 3x funds were still in a transient stage, and have since calmed down to match the funds they are tracking fairly well over a long period of time.

5/1/2009 - 12/31/2009
Russell 2000: +28.4%
TNA : +87.5%
TZA : -66.2%

1/1/2010 - 12/31/2010
Russell 2000: +22.4%
TNA : +57.2%
TZA : -65.6%

Also, most of the negative talk about the why 3x Leverage funds are so bad is from, in my opinion, the Options guys, and the Mutual Fund managers that are losing customers because of how easy and conveinient the ETF are.

But the most important thing is to think for yourself and do not necessarily believe everything you read, even my little rant.

Peterson82

[etftalk]

Thanks for the update Peterson. I hope you are right, but I think the results of (the 2X & 3X ETF's) depend on the market action. A strong trending market will result in very good returns in an ETF, and that's what we have seen recently.

It's the choppy markets that cause these ETF's problems. The daily compounding makes it a victim.

As an extreme hypothetical example:

If the Russell 2000 is trading at $1000, and is up $100 on Monday, then down $100 on Tuesday, you would think that your ETF would be flat since the Russell 2000 is flat at $1000.

But that's not how they do it (from what I understand). Your 3X ETF would be up 30% on Monday (10% x 3) and down 27.3% on Tuesday (9.1% x 3). That 9.1% is based on $100 loss on Tues from Monday's $1100 closing price.

So if the ETF started at $10 a share and was up 30% on Monday, it is now valued at $13.

Tuesday it is down 27.3% and that leaves the share price at $9.45. You actually lost 0.55% instead of being flat.

Compound that over a long choppy period and you can see how investors would not be happy.

But in a market that is moving higher 3 out of every 4 days, it's not a bad deal, and can actually give better results.

If you've heard of them changing this problematic situation, I'd like to read about it, because it is a tough environment to trade in.

Thanks!

[peterson82]

Thanks for the update Peterson. I hope you are right, but I think the results of (the 2X & 3X ETF's) depend on the market action. A strong trending market will result in very good returns in an ETF, and that's what we have seen recently.

It's the choppy markets that cause these ETF's problems. The daily compounding makes it a victim.

As an extreme hypothetical example:

If the Russell 2000 is trading at $1000, and is up $100 on Monday, then down $100 on Tuesday, you would think that your ETF would be flat since the Russell 2000 is flat at $1000.

But that's not how they do it (from what I understand). Your 3X ETF would be up 30% on Monday (10% x 3) and down 27.3% on Tuesday (9.1% x 3). That 9.1% is based on $100 loss on Tues from Monday's $1100 closing price.

So if the ETF started at $10 a share and was up 30% on Monday, it is now valued at $13.

Tuesday it is down 27.3% and that leaves the share price at $9.45. You actually lost 0.55% instead of being flat.

Compound that over a long choppy period and you can see how investors would not be happy.

But in a market that is moving higher 3 out of every 4 days, it's not a bad deal, and can actually give better results.

If you've heard of them changing this problematic situation, I'd like to read about it, because it is a tough environment to trade in.

Thanks!

So, even after 6 months the return in almost exactly 3x the Russell 2000 it is bad because you are comparing to a fund you don't even own?

Not sure it matters... Numbers are numbers. If the long term return is (based on just share prices) is 3x (or close) you have what you bought the fund for.

[XL-entLady]

When the leveraged funds were first introduced they were for day traders only. Because of the way the returns were figured, swing traders could get burned even when the overall trend was going their way. I bought a 3x leveraged financial fund, held it for just three weeks and got torched, even though the 1x fund went up during the same timeframe.

Sometime after the leveraged funds were introduced, there was a change in the way they were figured over time so that they were more attractive to swing traders. But I wasn't paying enough attention to be able to tell you details. I was burned badly enough by my foray that I swore off leveraged funds.

Good luck if you try them. I know several people who have good returns using them now.

Lady

[etftalk]

If the long term return is (based on just share prices) is 3x (or close) you have what you bought the fund for.
But the thing is, that it is not. At least during certain market conditions.

Did you get a chance to see that video?

http://www.youtube.com/watch?v=qEYW2CPWHYE

http://www.youtube.com/watch?v=Muz4HmFYrHs&feature=related

[Nate]

So according to these guys, leveraged funds have no business in my "perspective buys" spreadsheet. Too many other funds to watch with less long term risk. Poof goes FAS, UYG, DRN, URE, FCGL, and ERX.

[etftalk]

It dcould work in your favor, but most likely not. It doesn't mean you will lose money, but your risk to reward is less than you think.

They are better for trades than investments.

[Nate]

Yeah I understand, but I've got my focus set dead on buidling a base first, with long term growth. Now if I were transferring to a broker with lower trading commissions, I could afford to buy & sell more frequently....