Year to Date Performance of Leveraged ETFs

In our last post we looked at non-leveraged ETFs, and below we highlight the best and worst performing leveraged ETFs so far in 2009. Even though the market is trading close to flat year to date, only 27 of the 110 leveraged ETFs that we track are up for the year. The double long technology ETF (ROM) is up the most at 36.37%, followed by the double long semiconductor ETF (USD), the double long QQQs (QLD), and the double short long-term Treasury ETF (TBT). The second best performing double short ETF is the Japanese Yen (YCS).

click to enlarge

The list of the worst performing leveraged ETFs this year shows just how crazy these products can be. The two worst performing leveraged ETFs in 2009 are the three times financial short and long securities! FAS (long) and FAZ (short) track the Russell 1,000 financial sector, which is down a little more than 2% this year. Even though the sector is down, the 3x short ETF (FAZ) is down more than the long one. And they're both down by huge amounts even though the sector itself is only down a couple hundred basis points. FAZ is down 82%, and FAS is down 62%! Wow.

Comments

[Mad Hedge F...:]

this is an accident waiting to happen. We are gathering a head of steam towards our next financial crisis, even before the current ones are solved. The perpetrator will be new financial product du jour, the super leveraged Exchange Traded Funds (ETF’s), which are being created at a breakneck rate, sucking in billions of dollars from investors. ProShares has filed for 94 funds, which offer traders 300% long or short plays in markets as diverse as the Russell 1000 Index, the MSCI Malaysia Index, and the Nikkei 225 stock average. Direxion has gathered $3.4 billion with 16 different 3X funds launched since November. There are now more than 800 ETF’s, and I have been a big fan of those for emerging markets (EEM) and short Treasuries (TBT), which allow investors to take positions in niche sectors and foreign markets which are otherwise difficult or expensive to get into. These also allow mutual funds the only means to go short, and include tax advantages and hedging opportunities. But the leveraged versions include risks that most buyers don’t fully understand, even if they parse through the voluminous prospecti with a magnifying class. They promise their triple tracking only for the day you buy it. Beyond that, the tracking error can be huge. The mechanics of these funds force them to be buyers of every rally and sellers of every dip. Over time, leveraged short funds can actually suffer large losses, even in falling markets, and vice versa. It is just a matter of time before one of these goes to zero, wiping out investors. They are already being blamed for an increase in market volatility in the last hour of trading. Gaming sector ETF’s has become the new blood sport for nimble hedge funds. You can expect a replay of a movie you’ve seen before. At the first sign of trouble, liquidity will disappear, auditors will mark them down to nothing, and suddenly the whole world will be for sale. Sound familiar? You have been warned!

May 06 05:30 PM

[Gary Gallo:]

Of course a buy in FAS less then two months ago would have yielded a 300%+ return. {recommended FAS here at 3.71, UYG 2.18} As ive stated in the past buy every leveraged fund you can get that falls under 5.00, under 3.00 is better yet. Of course 5% or so in each is enough. Very limited downside and huge upside. Other then day or swing trading I feel this is the only way. And a better way at that. Its the chop that kills these funds. In a strong trend you can`t beat them. Ive found tight trendlines on established trends work very well as buy and sell signals. tip: No matter what you think the market should do you must pay attention to what it IS doing. Arguing with the market is a sure way to lose all your money fast.

May 06 06:14 PM

[RiskReturnO...:]

TBT is breaking out of $50 rresistance, roughly equivalent to 10-Year Treasury Yield of 3.2%. Watch volume carefully as we are set up for very rapid rise on any indication of stronger economic outlook (perhaps as early as Friday's unemployment report coming in better like ADP payroll figures). As much as I hate these double / triple leveraged ETF's, I don't know of a liquid way

May 06 08:06 PM

[Zeon:]

Leveraged ETFs are for trading, not investing. Where else can you make 25 percent in two weeks? Of course, don't bet the farm on them. DIG and DXO have worked for me over the past several months.

May 06 08:28 PM

[ELEV:]

Hi there...I just picked up FAZ today for 5.25...expecting that even if it doesn't happen tomorrow or Friday...the financials will have to swing back...am I kidding myself...? Any strategy for holding or selling? (this is my first ETF holding)...If it drops 20% tomorrow...keep holding til it turns around, or cut my losses? I'm feeling nervous cause I'm basically trying to time the market based on what I think it should do, and assuming that the stress test is already baked into the financials run. Any advice would be appreciated! thanks,Erik


On May 06 06:14 PM Gary Gallo wrote:

> Of course a buy in FAS less then two months ago would have yielded
> a 300%+ return. {recommended FAS here at 3.71, UYG 2.18} As ive stated
> in the past buy every leveraged fund you can get that falls under
> 5.00, under 3.00 is better yet. Of course 5% or so in each is enough.
> Very limited downside and huge upside. Other then day or swing trading
> I feel this is the only way. And a better way at that. Its the chop
> that kills these funds. In a strong trend you can`t beat them. Ive
> found tight trendlines on established trends work very well as buy
> and sell signals. tip: No matter what you think the market should
> do you must pay attention to what it IS doing. Arguing with the market
> is a sure way to lose all your money fast.

May 06 08:48 PM

[super:]

These numbers must be wrong!!!!
Ultra QQQ ProShares (QLD), is up 0.45% YTD
finance.yahoo.com/q?s=...;=

According to your list it's up 32.54% YTD

May 06 10:58 PM

[CTrader11:]

ELEV, I own FAZ a few points higher. It feels like its going to 2. I'm going to double down there, hope for a huge bounce then get out and never come back.

May 06 11:43 PM

[Marsden:]

Definitely a learning process with regard to leveraged ETFs. I made a killing on SKF in 07 and 08 but FAZ is ruining me and I thought I got in at a good price. Live and learn. The first comments here explain it pretty well. Tricky tricky tricky.

May 07 12:44 AM

[Marsden:]

And what about all the conversions from preferred to common shares for the taxpayers' money? It's yet another reward for banks at still greater risk for the citizenry, which is borrowing all this money from our own future earnings. What's in it for us, exactly? And no dilution, really?

So now private investors are reassured, and will start pouring their money into banks (on top of the money they already poured in as taxpayers), the banks will resume their careless lending and all will be well. What a crock.

Oh well, it's dangerous to be right when the government is wrong.

May 07 01:03 AM

[curley55:]

The problem with FAZ and FAS is they are like options and they are consistantly in at the wrong strike price. Both have declined this year. There is something wrong here. They are definitely not long term investments. Looking at the numbers it would have been good to short both FAZ and FAS on January 1.

The banking problem is one of lax regulation. Regulators failed to require the banks to cut back on their 30 to 1 leverage. The regulators, and Congress especially the banking committee are at fault. Instead of fixing the problem our government has shifted the leverage to the tax payer and have told us this is a good investment and we should make a profit. Lies, lies and more lies. Where is the promised transparentcy? Keep the public in a state of fear and panic and a corrupt administration can fleece us even more because they claim they have the answers to fix the problem. The truth is they failed to regulate and are unable to fix the problem and will make it worse. Vote them out of office!

May 07 10:15 AM

[mlyn:]

Tim Geithner said on the Charlie Rose Show that the financial system can no longer do business as it did in the last ten years; that regulatory controls are inevitable. Neel Kashkari said there should be a systemic risk regulator, probably the Fed.

So How did the 2X and 3X ETFs come to be with convoluted and disingenuous disclosures? How do financial products get put into the market when they are proving highly leveraged and risky. If we are automatically losing money in these leveraged ETFs, who is making the money?

May 08 12:43 AM

[Andreas:]

Reduce your risk to almost 0. The higher US stocks climb the higher the Euro will go following a parallel trend with the Oil price. Making an even better deal is to invest in CEE currencies. They all have a yield above 10% and they all follow the Euro. Which means so long US companies reduce their dividends you can easily make easy $$$ by investing in Euro related currencies.

May 08 01:44 PM

[Ames Tiedeman:]

The 200 leverage and 300 leverage ETF's are daily and weekly trading vehicles only. Do NOT buy any of these with the idea of buying and holding them for years. They react to the daily swings of a given index or a basket of stocks. They do not COMPOUND like a mutual fund. Time clearly eats away at their value regardless of market conditions. The 2009 results of FAZ and FAS show this. One needs a mathematician with a computer to models these based on given assumptions. All you can basically hope to do at this point is trade them vigorously on a weekly basis, if you must.

May 09 04:37 PM

[etftradersg:]

I am looking for newsletter or real-time trade alert service that provides recommendations on ETF trading.

Do you know of any such service ?

Sanjay



On May 06 06:14 PM Gary Gallo wrote:

> Of course a buy in FAS less then two months ago would have yielded
> a 300%+ return. {recommended FAS here at 3.71, UYG 2.18} As ive stated
> in the past buy every leveraged fund you can get that falls under
> 5.00, under 3.00 is better yet. Of course 5% or so in each is enough.
> Very limited downside and huge upside. Other then day or swing trading
> I feel this is the only way. And a better way at that. Its the chop
> that kills these funds. In a strong trend you can`t beat them. Ive
> found tight trendlines on established trends work very well as buy
> and sell signals. tip: No matter what you think the market should
> do you must pay attention to what it IS doing. Arguing with the market
> is a sure way to lose all your money fast.

May 13 03:32 AM

[Everyday Fi...:]

I've visually demonstrated the "riskiest ETFs on earth" as the ever-depreciating assets that they are over any period of time greater than weeks, especially if a trend breaks - shows how you can get killed on a long OR a short 3X regardless of what the underlying index does. Hope this helps save some retail investors some money; these are for day trading for the most part:
www.darwinsfinance.com.../

May 31 02:49 PM