Ultra ETF Reality Check

I’ve tried to stay away from instruments for the most part as I had a hunch the way they calculated their returns were suspicious at best. Eric Muathe did some good chart work here and packaged it up in a video for all to see. There’s really no disputing that trading the 2x and 3x ETFs is a loser’s game as it’s easy to see you can lose money if you are in both at the same time. That shouldn’t even be mathematically possible, but someone is rigging the game.

I would trade the regular tracking ETFs with more leverage if you’re aiming for bigger returns and stay away from the ultra exchange traded funds.

Comments

[market ace:]

Amen to this advice. These double ETF's are a nightmare for long term investors, but can be used for day trading. Some that track commodity prices are not too bad, but any that track indexes really SUCK!.

Feb 09 02:42 PM

[squark62:]

jeff, i agree with you that chart history of some of the leveraged etfs betray their advertised 'performance' - i would include DUG in your list. however, it would be a mistake to conclude these instruments are useless by themselves. they can be good ingredients for building a simple hedge when paired together with their respective inverse etfs. using some classical mathematics, it's possible to weight each pair to construct a delta neutral hedge. this can be very useful for the individual investor how doesn't trade options or swaps. the etf does it for you. now i will say the better the etf tracks it's index, the better the hedging performance will be. look at SDS & SSO as a pair. very efficient tracking but still very useful for hedging against sudden down turns in the market.

Feb 09 02:59 PM

[User 354180:]

I don't really understand why you say it's mathematically impossible to lose money in both. Here's an (extreme) example to show that both can lose money in a market that is very volatile.

Let's say that there are two ultra ETFs, long and short, both at $100 value. If the market goes up 49.5%, then the ultra long ETF has made 99% (value of $199) and the ultra short ETF has lost 99% (value of $1). The next day the market goes back to the old level and so loses about 33%. That means the ultra long ETF loses 66% (value of $66) and the ultra short ETF gains 66% (value of $1.66).

So even when the market is back to it's old value, a combined position of $200, $100 ultra long and $100 ultra short, has lost $132, or 66% of it's value.

Feb 10 04:00 AM

[doctordoctor:]

plus have noticed each day the longs/shorts are not symmetric. not sure why not, at least in terms of bgu and its ilk.

Feb 11 10:24 PM

[Kunst:]

"it’s easy to see you can lose money if you are in both at the same time. That shouldn’t even be mathematically possible, but someone is rigging the game."

What do you mean, it shouldn't be possible to lose money if you are in both at the same time? This is what SHOULD happen. There are expense ratios on top of the leverage issue. This is like playing both red and black in roulette and expecting to make money over the long run.

Feb 12 01:38 AM

[tunaman4u2:]

If you bought both SSO & SDS the total value would be...
SSO + SDS = 132 in Feb 14th 2008
SSO + SDS = 101 in Feb 14th 2009

You would have made big cash shorting BOTH equally in 08 correct?
Will they continue to have a huge decay over time because if so it looks like shorting both over the long term is a pretty safe way to big returns.

What am I missing?

Feb 12 06:12 PM

[mule65:]

Same ole tiresome leveraged ETF bashing. If they're a "loser's game" then why not short them? Nobody complains when they exceed their 2x or 3x objectives when they trend in favor.

www.proshares.com/fund...

Apr 08 01:06 PM