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Thread: The problem with leveraged ETF's...

  1. #11

    Join Date
    Dec 2007
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    906

    Default Re: The problem with leveraged ETF's...

    That would probably only work in a volatile market. Once we get a strong trend, it won't be as effective.
    -- Tom | My Trades

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  3. #12

    Join Date
    Dec 2007
    Posts
    906

    Default Re: The problem with leveraged ETF's...

    I did a little rough math and if the market is in an uptrend, it seems to pay to be long the long leveraged ETF's rather than to short the short leveraged ETFs.

    Let's say during a 13-day period, the S&P 500 was up 10% one day, then down 5% the next, up another 10%, down 5%, etc.

    After 13-days:

    The S&P would be up 43.2%

    A 2X leveraged long ETF would be up 90.4% (43.2% x 2 = 86.4%)

    A 3X leveraged long ETF would be up 136.7% (43.2% x 3 = 129.6%)

    So, the longer that trend continues, the more advantage to the leveraged long ETF.
    -- Tom | My Trades

  4.  
  5. #13

    Join Date
    Jan 2009
    Posts
    1

    Default Re: The problem with leveraged ETF's...

    Tom --

    The problem with leveraged ETFs is that over long period of time they should go to zero.

    Right now they are all the rage since volatility is high... but once it calms down (and I beleive it will eventually) the math catches up to the leveraged ETFs.

    An asset that falls 2% needs to gain more than 2% to get back to even... You know the drill -- down 50% needs up 100%, down 75% needs 400% to get back to even, etc.

    So over long periods of time when volatility is constantly low, oscillating between say +.25% and -.25% per day, the price should continue to drift lower and lower. (Actually it should work if volatility is high -- so long at it is contant, but who wants to subject themselves to that.)

    This should be the case for anything that is double -- both to the upside and down. So theoretically (assuming a lack of margin maintenance requirements, etc.) a person could be short both the ultralong and ultrashort instruments at the same time and over long periods of time they should both go to zero.

    Ken

  6.  
  7. #14

    Join Date
    Dec 2007
    Posts
    906

    Default Re: The problem with leveraged ETF's...

    Thanks Ken -

    Yes, we came to that same conclusion earlier in this thread (see post #6 and 9 in this thread).

    In my post above, I just wanted to do the math on a market trending steadily higher, just to see how it would work.
    -- Tom | My Trades

  8.  
  9. #15

    Join Date
    Feb 2009
    Posts
    654

    Default Re: The problem with leveraged ETF's...

    More dark clouds from the 3x ETFs:

    All Original 3x ETFs Are Down Over Last Six Months


    "Over on the Seeking Alpha site, there is a lively debate on my article on 3x ETFs. Many commenters note that Direxion says the funds are intended to track daily changes (on a leveraged basis) and may or may not track changes over a longer period of time.


    Good point. But if it was just a tracking issue, then we would expect that some of the ETFs would outperform their targets, some would match the target, and some underperform.


    That’s not what happened. Every single one of the original 3X ETFs — both bull and bear — is down big over the last six months. That’s not a function of a tracking error. It's a structural flaw in these instruments.....[more]"

    http://seekingalpha.com/article/1331...le_lb_articles

    The 3x ETFs have caused me nothing but grief. Once the monthly 3x ETFs have arrived I may try them again but I'm not touching the current ones! Every major loss in my Roth can be traced back to FAS/FAZ or TNA/TZA. I paid tuition payments to ETF University for those buys.

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

  10.  
  11. #16

    Join Date
    Dec 2007
    Posts
    906

    Default Re: The problem with leveraged ETF's...

    No wonder Scottrade never has any shares of these to short. They short them themselves.

    Maybe we can get a bailout.
    -- Tom | My Trades

  12.  
  13. #17

    Join Date
    Dec 2007
    Posts
    906

    Default Re: The problem with leveraged ETF's...

    The Russell 2000 is up about 6% in 2009.

    TNA, the 3X long Russell ETF, is down 5%...



    The TZA (3X short Russell) is down over 40%.

    -- Tom | My Trades

  14.  
  15. #18

    Join Date
    Feb 2009
    Posts
    654

    Default Re: The problem with leveraged ETF's...

    Yeah, those things are poison IMO.

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


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  17. #19

    Join Date
    Mar 2009
    Posts
    36

    Default Re: The problem with leveraged ETF's...

    Anyone have any info about FAZ doing a reverse split? I caught a short snippet of information...something about FAZ shares tomorrow will show a significant rise in price due to the split? I know most here shy away from 3x etf but if anyone knows where I could get some info let me know. I kinda liked the fact that FAS/FAZ were so inexpensive that anyone could afford them. Now it looks like they are going to limit a lot of people.
    Thanks in advance.
    wv-girl

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  19. #20
    alevin Guest
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    Default Re: The problem with leveraged ETF's...

    Hi WV-girl. Yes, I read a reference to this sometime in the past day myself, but since I don't play with it, paid little attention. I googled "FAZ reverse split" and came up with indexuniverse.com article from yesterday confirming the action.

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