Triple-Levered ETFs: Bomb Shelters, or Bomb-Making Kits?

In case people hadn’t noticed, levered ETF companies are planning to turn the volume up to eleven. We are seeing a new class of triple-levered ETFs launched, with the idea that you will get triple the daily return of the underlying index, depending on whether you bought the short or the long variant.

Now, levered ETFs aren’t new. We have had long and short index ETFs for some time, as well as double-levered such things too. But the rise of triple-levered ETFs at a time when volatility measures are doing moonshots strikes me as unusual, at best, and possibly marking a new source of market risk.

Granted, the current assets aren’t massive, but these levered products are sizable. Their impact can also be considerably larger given the underlying leverage, and given how retail investors can be buy levered ETFs with … well, leverage.

Here is some quick and cursory data that I put together that I think is fairly striking on asset growth at some of the more popular levered ETFs. In particular, I was intrigued by how much more popular the double-levered variants of such things are –- people wants their volatility in big chunks, apparently.

Comments

[No Free Cake:]

When someone offers a 39:1 levered ETF it will be more fun than roulette! :)

2008 Nov 04 04:30 PM

[David Lentz:]

You can buy options on the leveraged ETFs and crank your risk to the moon ...

2008 Nov 05 10:32 AM

[No Free Cake:]

To Infinity ... and beyond ...

2008 Nov 05 01:52 PM

[NOWHEREMAN:]

Options expire ETFs don't, besides if you are going with options why bother with the ETFs themselves?

However, if you want insurance, buy married puts with them.

2008 Nov 06 03:25 AM

[squark62:]

hi paul,

i see this post has bee out for a minute but i'll comment any way. for an trader who doesn't do options, i think leveraged etfs in this type of market are a great way to hedge and/or make money by doing a delta neutral arbitrage. i've made out fairly well doing over the last 6 weeks with arbitrage scheme i developed by pitting sector based long & short etfs against each other. like anything else, it requires discipline and patience but it has worked for me - i don't trade options. i primarily use 2X etfs that are tightly coupled to each others relative changes. my favorite pairs are SKF-UYG and QID-QLD. plus, these etfs pay dividends and cap gains while you trade them.

2008 Nov 10 02:53 PM