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Thread: Leveraged ETFs

  1. #1

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    Default Leveraged ETFs

    For folks who have always traded in stocks, leveraged ETFs are a whole different breed of cat. If you are a 'buy-n-hold' type, run - do not walk - away. But if you stay on top of leveraged ETFs, they can reward you greatly. Here is a good article that explains why.


    How Leveraged ETFs Track Over Time
    By Tom Lydon on February 12, 2009

    Over time, it has been proven that levered exchange traded funds (ETFs) show greatly magnified disparity and erosion. But do most investors understand how or why?
    Know the Risks. These funds are quite different than your average run-of-the-mill fund. They are great tools to hedge, are extremely volatile, and give double or triple the exposure to a specific sector or market. In a nutshell, they do what they are designed to do, but their mathematical makeup results in internal compounding, which can have a dramatic effect on values.



    Elaine Southard of Seeking Alpha gives us an example of how this phenomenon works:
    • On a double levered ETF, a 20% loss on $1,000 results in a drop of $40. Compare this to a triple levered ETF, which generates a loss of $160 on the same 20% loss, or a hit of 4 times the initial loss.
    • Now repeat this over 14 cycles of both ups and downs, and the end result is a loss of 43.5% - it is almost impossible to have gains and losses of exactly 20% every trading session, this is just to emphasis the mathematics behind these funds.

    Know What You Own. This is just the way that these funds have been constructed and doesn’t necessarily make them good or bad. Consider this just part of knowing the risks of such funds and being aware of how they work.

    If you do want exposure to these ETFs, really do your homework, understand the ins and outs of these tools and keep in mind that these funds aren’t meant for a buy and hold strategy. [emphasis added]

    http://www.dailymarkets.com/stocks/2...ack-over-time/

    Lady
    If you think education is expensive, try ignorance. - Derek Bok


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  3. #2

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    Default Re: Leveraged ETFs

    Thanks for the info lady. My baby account needs to learn to walk before it gets into these types of trades. But I am making a note of it for future reference.

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  5. #3

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    Default Re: Leveraged ETFs

    Quote Originally Posted by justbizness45 View Post
    Thanks for the info lady. My baby account needs to learn to walk before it gets into these types of trades. But I am making a note of it for future reference.
    I actually found another post today that asserts it is easier to make money by shorting the ultra-longs than by going long on the leveraged shorts.

    http://www.etftalk.com/forum/showpos...91&postcount=9

    I'm still learning too, so that was an interesting concept!

    Lady
    If you think education is expensive, try ignorance. - Derek Bok

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