Leveraged ETF Performance YTD

Below we highlight the year to date performance of the many leveraged and inverse ETFs available to US investors. But first we want to highlight the 3x ETFs to show their year to date performance versus the indices they follow. Remember, these ETFs are meant to track the daily performance of the underlying indices, but many investors unfortunately hold them as long-term investments, where the performance can be way off.

As shown below, the 3x long large cap ETF (BGU) is down 41.55% year to date while the index it tracks is down 13.99%. This is right inline with where performance should be. However, the 3x inverse large cap ETF (BGZ) is up just 26.78%. Investors hoping for 3x have only gotten 2x in this case. The same holds true for the 3x inverse small cap (TZA), which is up 41.57% versus the underlying index's decline of 20%.

Where performance gets really bad is in the 3x inverse financial ETF (FAZ). While the underlying financial sector is down 28.15% year to date, the 3x inverse ETF is up just 0.34%! Investors who wanted to bet big against the financials this year using FAZ have been correct in their prediction but haven't made a dime on it (well maybe a dime).

click to enlarge

Below we highlight the 25 best and worst performing leveraged and inverse ETFs year to date.

Comments

[One Family'...:]

The perceived underperformance is just that - perceived...

The 3X inverse financial ETF inversely tracks the performance of the underlying Russell 1000 Financial Index on a DAILY basis 3X leverage. The volatilty however works against you.

Below is a quick example assuming indexes at 100 as the starting point:

1st day (index up 3% - 103) - FAZ at 91
2nd day (index down 3% - 99.91) - FAZ at 99.19
3rd day (index up 5% - 104.9) - FAZ at 84.3
4th day (index down 10% - 94.41) - FAZ at 109.59

So, over the course of just 4-days, there is a perceived underperformance - FAZ should have been at 116.77. But, the index tracks daily performance and so volatilty works against you. Moral of the story - leveraged indexes should only be used as short-term trading tools (not suitable for anything more than a holding period of a few days or for intra-day trades)...

Regards,
www.onefamilysblog.com

Mar 17 09:09 AM

[AndrewBaker:]

I hope that with all the comment over time about leveraged ETF, people, at least those on this site, do know that they are for day and short term trading only because of the way the math works. If you've got a long term trend you want to work, buy the 1x tracker for that index, sector, commodity, whatever.

Mar 17 09:32 AM

[squark62:]

the math doesn't have to work against you if you what to hold leveraged ETFs as a hedge for long periods of time. infact, a optimally balanced index pair trade of a 2X long (e.g. SSO) and a 2X short e.g. SSO) can keep your hedge on the +side for extended periods of time. i keep pointing this out time and time again. check out www.equityinformatics.com/ for some background.



On Mar 17 09:32 AM AndrewBaker wrote:

> I hope that with all the comment over time about leveraged ETF, people,
> at least those on this site, do know that they are for day and short
> term trading only because of the way the math works. If you've got
> a long term trend you want to work, buy the 1x tracker for that index,
> sector, commodity, whatever.

Mar 17 11:21 AM

[Ron Rowland:]

squark,
I disagree with your statement that you...

"can keep your hedge on the +side for extended periods of time. i keep pointing this out time and time again."

You rebalance your positions every day. Therefore you are changing your positions every day. Therefore this is not "long term". What you are describing is actually an endless series of one-day trades.

Just look at the relative strength of SDS vs SSO, it is not a straight line.

Mar 17 05:06 PM

[Whitehawk:]

I agree that volatility can affect returns on the 3x vehicles. But holding them for long periods is not a bad idea if you have targets in mind and "the trend is your friend."

Mar 17 05:57 PM

[squark62:]

during volatile periods of time, the advantage to my model is the ability to remain neutral through re-balancing. as a result conditions occur when the pair is weighted in favor of market direction and gains are made with no further re-balancing. the re balancing technique is not too different from covered call or put options. the arbitrage is based on moving averages so re-balancing need only occur once or twice a week.

also, the re-weighting model i developed is based on a non-linear optimization involving calculus of variations. the math is very similar to deriving equations of motion of systems of particles. the model involves solving for minimums as in Fermat's law of least change. from there the math offshoots into the nature of geodesics and wave mechanics. sounds too wild to believe? math and results don't lie.

cheers!


On Mar 17 05:06 PM Ron Rowland wrote:

> squark,
> I disagree with your statement that you...
>
> "can keep your hedge on the +side for extended periods of time. i
> keep pointing this out time and time again."
>
> You rebalance your positions every day. Therefore you are changing
> your positions every day. Therefore this is not "long term". What
> you are describing is actually an endless series of one-day trades.
>
>
> Just look at the relative strength of SDS vs SSO, it is not a straight
> line.

Mar 17 10:20 PM

[XRTrader:]

Although not for long term holding, i disagree with the statement made by OneFamily'sBlog that these triple ETFs are "(not suitable for anything more than a holding period of a few days or for intra-day trades)..."

In fact, FAS (3x financial bull) was near 2.50 on March 5. At the time of this writing (nearly 2 weeks later), FAS is near 6.30 (well over 100%). Obviously, hindsite was 20/20 in this case, but i think for periods of up to 6-8 weeks, this is a powerful trading vehicle to play "trends".

disclosure: long FAS and FAS calls.

Mar 18 01:58 PM

[Mad Hedge F...:]

This is the place to be. This could be the year of the Exchange Traded Fund (ETF), which was one of the few growth products in an otherwise disastrous year for the brokerage community. Asset allocators are attracted by the ability to make single sector bets, like in the USO (oil), leveraged short plays that would otherwise be banned, like TBT (200% short long Treasuries), and low fees. The only thing missing is liquidity, which is still inadequate in all but a few of the biggest funds. There is now thought to be $400-$500 billion invested in these funds, compared to $4 trillion plus in mutual funds, and the rate of innovation is accelerating. The early entrants in the field, like Vanguard and Barclays Bank, are raking in the cash, leaving more conservative families of funds like Fidelity in the dust. Expect to start seeing more ETF’s in your 401K’s and pension holdings.

Mar 18 09:08 PM

[Tristan Yates:]

Why write the same comment in three different threads?

Mar 19 12:31 AM

[#1 etfexpert:]

squark62, you contradict yourself in the incessant posts you've made on this topic and it almost reads like a form response that you copy and paste over and over. when you rebalance your positions you might be neutral, but by letting your positions drift from thier weightings, you are taking a directional bet. you are missing the point of the actual phenomenon that's taking place, and ultimately the trade you've put on, caused by the degenerative nature of the leverage built into these instruments. by shorting the leveraged pair you capitalize on the volatility that is otherwise working against you if you were long these etf's. The longer you leave the pair unbalanced, the more the "math" works in your favor. That's why on the long side you can't hold these for any extended period of time. Additionally, you're collecting theta in the form of the fund's management fees. And if you're doing it right, you should be profitable in either a downward or upward trending market, regardless of if there is any mean reversion and provided the volatility in the pairs is at a certain threshold. The only purpose of rebalancing is to prevent large drawdowns and since you aren't rebalancing every day it is wrong for you to say that you are market neutral. You are not.

it's almost as if you're trying to intimidate people with your presumed sophisticated mathematical application for a profitable trade here. First, the trade you've put on is not novel by any stretch of the imagination. There are more than a few that are employing a similar strategy profitably, myself being one of them. and unless you are just paper trading, then you've inevitably run into the issue of being able to borrow both sides of each pair in size.

additionally, you've posted that you're going to start a newsletter subscription service to your strategy for a nominal fee? your track record starts in October of '08. Who's going to buy into such a short history? and if this is such a lucrative strategy, shouldn't you be trying to attract some real money to manage like the guys at Clarus? i'm sure it would be a lot more fruitful than plastering the same messages on SA over and over touting the amount of money you are making in this trade.

and applying hysteresis to decribe the nonlinear characteristics of the returns exhibited by these etfs? you have got to be joking...


>squark62:
>
>during volatile periods of time, the advantage to my model is the >ability to remain neutral through re-balancing. as a result >conditions occur when the pair is weighted in favor of market >direction and gains are made with no further re-balancing. the re >balancing technique is not too different from covered call or put >options. the arbitrage is based on moving averages so re->balancing need only occur once or twice a week.
>
>also, the re-weighting model i developed is based on a non-linear >optimization involving calculus of variations. the math is very >similar to deriving equations of motion of systems of particles. the >model involves solving for minimums as in Fermat's law of least >change. from there the math offshoots into the nature of >geodesics and wave mechanics. sounds too wild to believe? >math and results don't lie.
>
>cheers!

Mar 20 02:31 PM

[squark62:]

#1 etfexpert:

1) you've made a lot of incorrect assumptions. first of all the, the data i have initially post on my website is to illustrate results in adverse market conditions. my analysis goes back over 18 months.

2) in this market if you can find a place to be neutral, your way ahead of the game. yes, profits are generated by letting the pair drift at various times. picture a ladder. as long as you know how many steps you've made from ground, you know your not just hanging in the breeze.

3) the subscription service is a data service targeted at individual investors who don't have access to this type of information. i'm an individual investor who figured out how to use this technique and i'm offering to others because nobody else is. are you?

4) the clarus guys are investment advisers which i am not. nor am i a certified financial analyst. so i don't manage other peoples money. that's how i put myself out there and have nothing to hide. plus to benefit from the services at clarus apparently their minimum investment is out of reach for the retail investor.

5) i never claimed i'm the only one to develop such a technique. i figured others have to, but nobody is making their knowledge accessible. i think they're afraid to because they don't have confidence in what their doing anyway.

you can take it or leave it.


On Mar 20 02:31 PM #1 etfexpert wrote:

> squark62, you contradict yourself in the incessant posts you've made
> on this topic and it almost reads like a form response that you copy
> and paste over and over. when you rebalance your positions you might
> be neutral, but by letting your positions drift from thier weightings,
> you are taking a directional bet. you are missing the point of the
> actual phenomenon that's taking place, and ultimately the trade you've
> put on, caused by the degenerative nature of the leverage built into
> these instruments. by shorting the leveraged pair you capitalize
> on the volatility that is otherwise working against you if you were
> long these etf's. The longer you leave the pair unbalanced, the more
> the "math" works in your favor. That's why on the long side you can't
> hold these for any extended period of time. Additionally, you're
> collecting theta in the form of the fund's management fees. And if
> you're doing it right, you should be profitable in either a downward
> or upward trending market, regardless of if there is any mean reversion
> and provided the volatility in the pairs is at a certain threshold.
> The only purpose of rebalancing is to prevent large drawdowns and
> since you aren't rebalancing every day it is wrong for you to say
> that you are market neutral. You are not.
>
> it's almost as if you're trying to intimidate people with your presumed
> sophisticated mathematical application for a profitable trade here.
> First, the trade you've put on is not novel by any stretch of the
> imagination. There are more than a few that are employing a similar
> strategy profitably, myself being one of them. and unless you are
> just paper trading, then you've inevitably run into the issue of
> being able to borrow both sides of each pair in size.
>
> additionally, you've posted that you're going to start a newsletter
> subscription service to your strategy for a nominal fee? your track
> record starts in October of '08. Who's going to buy into such a short
> history? and if this is such a lucrative strategy, shouldn't you
> be trying to attract some real money to manage like the guys at Clarus?
> i'm sure it would be a lot more fruitful than plastering the same
> messages on SA over and over touting the amount of money you are
> making in this trade.
>
> and applying hysteresis to decribe the nonlinear characteristics
> of the returns exhibited by these etfs? you have got to be joking...
>
>

Mar 21 09:08 PM

[#1 etfexpert:]

squark62,

since you think i'm making incorrect assumptions, let's just get a few things straight because by your answers i think you are grossly misrepresenting your strategy and therefore the product you are charging people for.

1. i've seen your product. and since all three are based solely off of proshares leveraged instruments, yes, you ONLY have 18 months of data because these things have ONLY been around since February of 2007. and even though you might have this data, you yourself admitted in another post on SA that your track record in this strategy only goes as far back as Oct. 2008, not even 5 full months. i think you need to be more upfront about that when you pitch your unproven product to people. what you are failing to realize and what also needs to be pointed out is that all you are doing is back testing. it is not difficult to optimize formulas against historical data to generate the most attractive results. no wonder they say hindsight is always 20/20.

2. YOUR STRATEGY IS NOT MARKET NEUTRAL. this is probably the most egregious claim you have been making. you yourself admit that profits, if/when you make them, are resultant from letting the pairs drift out of equal weight. guess what that means? YOU AREN'T NEUTRAL TO THE MARKET. and if the market should remain volatile and move against you directionally one way or another when your pair has drifted, then instead of booking profits you will book losses. but i guess you might not see that in a track record that has only been around since October.

3. if this data is geared toward individual investors who don't have institutional access, then why don't you address the problem of actually being able to borrow these etf's to short. i'm sure retail investors will have an even more difficult time of doing so than the pros. on a daily basis i check with my broker and guess what...they're not available to short. at best i've only been able to get one side of the pair. i don't see any disclaimers on your site or your data. your program tells me i need to rebalance but what do i do in the situations when i can't get the borrow? do i just sit tight and remain directionally exposed to the market? i have to wonder if you really have money to work in your own strategy because nowhere do you address the execution risks inherent in what you are trying to sell.

4. given the above comments i've made, it actually does sound like you have a lot to hide. or maybe you just aren't revealing/understanding the gaping holes in what you are trying to sell. there is a reason why investment minimums exist to be able to invest with Clarus and other hedge funds. it qualifies you as an accredited investor. the regulation is there in hopes that people with large sums of money to invest in risky strategies have a modicum of knowledge in what they are getting themselves into. i get that you are trying to address an underserved need, but you need to provide FULL DISCLOSURE.

5. or they are so confident that they can actually go run real money with it instead of claiming unproven success and trying to get people to buy into it.

i'll leave it. thanks

Mar 24 03:12 PM