Why Leveraged ETFs Are Bound to Deteriorate

As posted on my blog July 11, 2009, after reading a lot of blog posts and comments, tweets on twitter, Facebook comments, and emails, I decided it was time to figure out if there was any real decay behind the leveraged ETFs, both long and short. I wanted to revisit this issue of the double and triple leveraged ETFs, and why investors should stay away from them, and to clear up some confusion. With the popularity of ETFs came these funds which use 200% and 300% leverage. Yes in any steady trend they can grow like weeds, but in a correction they will give back much of their gains. This is simple, and basic math.

First of all, these are extremely risky, and investors shouldn't hold on to any leveraged ETF(s) for the "long run", they are almost sure to lose money. These instruments are ideal for traders not investors!

Second of all, let's identify what a leveraged ETF does. A double leveraged ETF uses 200% (triple uses 300%) leverage to capture a specific basket, sector, or index move. Let's take the very popular SDS, which is a 2X inverse tracking the S&P 500; for every 1% move up in the S&P 500 index, SDS will move down by 2%, and for every 1% move down in the index, SDS will move up by 2%. Similarly is the SSO, which is the 2X tracking the S&P 500; for every 1% move up in the S&P 500 index, SSO will move up by 2%, and for every 1% move down in the index, SSO will move down by 2%.

If you're the person who says "It's a great way to hedge my portfolio, so what's the problem with them?", then clear all your other thoughts and read this post carefully - it may save you some money.

It's basic math that so many people overlook! Let's use the benchmark S&P 500 index for an example. Let's say we start off on the S&P 500 at 1000 and a double and triple leveraged ETF both at $100 per. If the benchmark index moves down 10% in 1 week to 900, and assuming both ETFs track perfectly it would put the double leveraged ETF at $80 per share, and the triple leveraged ETF at $70 per share.

Here is where some investors don't use those basic math skills they learned so many years ago, and assume that when the S&P gets back to 1000, the leveraged ETF will trade at the identical value as before, when the S&P was at 1000... THIS IS FALSE!

Basic math tells us this is impossible. In order for the benchmark to get back to 1000 it will need to go up by 11.11% which will correlate to a 22.22% and 33.33% move in the double and triple ETFs respectively.

As we can see, in order to get the double leveraged ETF back to 100 from 80, the benchmark will need to increase by 12.5% correlating to a 25% increase in the double ETF. The triple leveraged ETF will need an even greater move to get back to 100. In order for the triple ETF to get back to 100 from 70, the benchmark will need to increase by 14.283% correlating to a 42.85% increase in the triple ETF.

To show how this works I have created an Excel spreadsheet. I have downloaded historical data on the S&P 500 Index for exactly one year, back to the closing index value on July 11,2008. Assuming these leveraged ETFs track perfectly with the change in the index (which is incorrect but they do track very closely), the spreadsheet shows the changes for 4 different leveraged ETFs.

The ETFs tracked are: Double Leveraged Long index, Triple Leveraged Long index, Double Leveraged Short index, and Triple Leveraged Short index. I also started each ETF at 100 on July 11, 2008 (this is not where they started, but will not make a difference in the % change). These ETFs don't assume any capital gains distributions, splits etc...

Click here for more information about how to download this spreadsheet.

As you can see, for the past year the index is down 29.07%, the double leveraged long down 59.14%, the triple leveraged long down 81.02%, the double leveraged short ETF up 6.8%, however the triple leveraged Short ETF is also down 20.11%. Many would have assumed the double and triple leveraged short ETFs would be up 58.14% and 87.21 respectively over this period. This is certainly not the case. These ETFs seem to decay over time, again this is proven with basic math! I will show you some scenarios in the following three tables.

Scenario #1: The table below shows an index moving up by 1% on the first day, and down by 0.990099% on the following day. The same two day occurrence is repeated over 20 trading days (market moves exactly sideways over 20 trading periods).

	Index	2X Long	2X Short	3X Long	3X Short
Start price	1000	100	100	100	100
% Change
1	1010	102.00	98.00	103.00	97.00
-0.99009901	1000	99.98	99.94	99.94	99.88
1	1010	101.98	97.94	102.94	96.88
-0.99009901	1000	99.96	99.88	99.88	99.76
1	1010	101.96	97.88	102.88	96.77
-0.99009901	1000	99.94	99.82	99.82	99.64
1	1010	101.94	97.83	102.82	96.65
-0.99009901	1000	99.92	99.76	99.76	99.53
1	1010	101.92	97.77	102.76	96.54
-0.99009901	1000	99.90	99.70	99.70	99.41
1	1010	101.90	97.71	102.69	96.43
-0.99009901	1000	99.88	99.64	99.64	99.29
1	1010	101.88	97.65	102.63	96.31
-0.99009901	1000	99.86	99.58	99.58	99.17
1	1010	101.86	97.59	102.57	96.20
-0.99009901	1000	99.84	99.53	99.53	99.05
1	1010	101.84	97.54	102.51	96.08
-0.99009901	1000	99.82	99.47	99.47	98.94
1	1010	101.82	97.48	102.45	95.97
-0.99009901	1000	99.80	99.41	99.41	98.82
Change %:	0.00	-0.20	-0.59	-0.59	-1.18

As you'll notice the index is back to even and all 4 of the leveraged ETFs are below their initial starting values, in just 20 trading days.

Similarly this can be said if we reverse the order of the % changes, as in the first day the index goes down 1% and the follow day the index returns to the start by moving up by 1.0101%. The changes are insignificant over a 20 days period, but as you can see if the first day results in a loss versus a gain, the value of the ETF at the end of the 20 day period is a bit lower.

	Index	2X Long	2X Short	3X Long	3X Short
Start price	1000	100	100	100	100
% Change
-1	990	98.00	102.00	97.00	103.00
1.01010101	1000	99.98	99.94	99.94	99.88
-1	990	97.98	101.94	96.94	102.88
1.01010101	1000	99.96	99.88	99.88	99.76
-1	990	97.96	101.88	96.88	102.75
1.01010101	1000	99.94	99.82	99.82	99.64
-1	990	97.94	101.81	96.82	102.63
1.01010101	1000	99.92	99.76	99.76	99.52
-1	990	97.92	101.75	96.77	102.50
1.01010101	1000	99.90	99.70	99.70	99.40
-1	990	97.90	101.69	96.71	102.38
1.01010101	1000	99.88	99.64	99.64	99.27
-1	990	97.88	101.63	96.65	102.25
1.01010101	1000	99.86	99.58	99.58	99.15
-1	990	97.86	101.57	96.59	102.13
1.01010101	1000	99.84	99.52	99.52	99.03
-1	990	97.84	101.51	96.53	102.01
1.01010101	1000	99.82	99.46	99.46	98.91
-1	990	97.82	101.44	96.47	101.88
1.01010101	1000	99.80	99.40	99.40	98.79
Change %:	0.00	-0.20	-0.60	-0.60	-1.21

Scenario #2: Let's say the market rallies 25.02% (1.5% a day for 15 days in a row), and then corrects 15.32% (from high) in the following 11 trading days (down 1.5% a day for 11 days). In the table below I will plot exactly this example, once again using basic math.

	Index	2X Long	2X Short	3X Long	3X Short
Start price	1000	100	100	100	100
% Change
1.5	1015	103.00	97.00	104.50	95.50
1.5	1030.23	106.09	94.09	109.20	91.20
1.5	1045.68	109.27	91.27	114.12	87.10
1.5	1061.36	112.55	88.53	119.25	83.18
1.5	1077.28	115.93	85.87	124.62	79.44
1.5	1093.44	119.41	83.30	130.23	75.86
1.5	1109.84	122.99	80.80	136.09	72.45
1.5	1126.49	126.68	78.37	142.21	69.19
1.5	1143.39	130.48	76.02	148.61	66.07
1.5	1160.54	134.39	73.74	155.30	63.10
1.5	1177.95	138.42	71.53	162.29	60.26
1.5	1195.62	142.58	69.38	169.59	57.55
1.5	1213.55	146.85	67.30	177.22	54.96
1.5	1231.76	151.26	65.28	185.19	52.49
1.5	1250.23	155.80	63.33	193.53	50.12
-1.5	1231.48	151.12	65.22	184.82	52.38
-1.5	1213.01	146.59	67.18	176.50	54.74
-1.5	1194.81	142.19	69.20	168.56	57.20
-1.5	1176.89	137.93	71.27	160.97	59.77
-1.5	1159.24	133.79	73.41	153.73	62.46
-1.5	1141.85	129.77	75.61	146.81	65.28
-1.5	1124.72	125.88	77.88	140.21	68.21
-1.5	1107.85	122.10	80.22	133.90	71.28
-1.5	1091.23	118.44	82.62	127.87	74.49
-1.5	1074.86	114.89	85.10	122.12	77.84
-1.5	1058.74	111.44	87.66	116.62	81.34
% Change	5.87	11.44	-12.34	16.62	-18.66
Assumes %		11.75	-11.75	17.62	-17.62

As you can see the net gain for the index was 5.87%, however all 4 of the leveraged ETFs did not perform as they were suppose to. Note that this is only over 26 trading days about 10% of the trading year.

You will also notice at the bottom of the spreadsheet I created, a simulation to show how the index (over the next 250 days) could get back to even the level it was at on July 11, 2008, and the resulting % changes from $100 per share for each leveraged ETF. This proves how dangerous they are... They are all down even when the index is back to even!

The question you may be asking me is: You blog about these ETFs all the time, don't you use them?

My answer is absolutely, I actually prefer these to any given stock. This is because I am a trader of these instruments (not to mention young with high risk tolerance), and I use them for short covered call/naked put option strategies. The reason behind this is simply because they have such large premiums on the options, they can be used many different ways to create additional income for my portfolio. I do not think any investor should be in these, but I know many are. This post only talks about what I call the less risky of the leveraged ETFs, this is because I talk about the leveraged ETFs that track the indexes. Some of the most popular leveraged ETFs are ones that track specific sectors, like the super volatile: FAS, FAZ, SKF, UYG, TNA, TZA, URE, SRS, and many more.

In conclusion, it certainly depends on the price these ETFs are purchased at, but over the long run, based on simple mathematics, and the assumption that the stock market won't go in one direction forever, they are sure to deteriorate. This is why I believe these are great instruments to trade, but not to invest in.

Disclosure: Long FAS, FAZ, UCO, TNA, SSO

Comments

[NormK:]

Great analysis. Helps reinforce my understanding of past mistakes. I have seen this exact scenario happen for UYG in the past few weeks. When it blew out 4.5 on May 8, that would (in hindsight of course) been the time to sell. It came down sharply since then and erased gains way before the underlying stocks settled back down.
Norm

Jul 13 10:30 AM

[kkerr:]

Good article and I am glad you are spreading the word about decay. However, the leveraged bulls are not guaranteed to deteriorate (the leveraged bear ETFs almost certainly will), because in a bull market the uptrend can potentially outgain the loss from decay. It really depends on the timeframe. If a leveraged bull is held through a bull market until the next bear market, yes the gains will vaporize. I wrote custom software to run many simulations and have written several articles on how leveraged ETFs decay and compound. My latest article includes a technique for actually measuring the amount of decay. I've even released a free utility for calculating the estimated decay, as well as simulating a leveraged ETF from 1x ETF data. (The simulations do not include costs from fees, transactions, or other expenses).

Here is the article on measuring leveraged ETF decay:
blog.quantumfading.com.../

Jul 13 10:44 AM

[widestrides:]

But wouldn't ANY volatile stock be subject to the same "decay?" If a biotech stock goes up 10% one day and down 10% the next, it also is not back to even. It has decayed 1%.

So it is the volatility that creates the danger, and true these leveraged ETFs are leveraged by design, but they aren't necessarily volatile. True, they have been this past year, but this has been a volatile year and a "perfect" storm to decay these ETFs. But if they trend your way or if you "rebalance" them yourself, you can take the decay out of them.

GL

Jul 13 12:40 PM

[User 243258:]

To say it another way they are path dependent not direction dependent. the double and triple ETFs are a flawed contract and should be banned or at least come with a very stern and explicit warning.

Jul 13 12:40 PM

[mrboast:]

What's interesting is if it continues to go down and down and down the inefficiency actually helps you. 3 consecutive 5% down months yield a -14.26% cumulative return on an index, but for a 2x ETF it yields -27.1% not (2 X -14.26%). It becomes inefficient when there are up swings and down swings (which of course there are) But I do need help on my hypothetical! Great article!

Jul 13 01:29 PM

[Xyrus:]

Widestrides said:
"But wouldn't ANY volatile stock be subject to the same "decay?" If a biotech stock goes up 10% one day and down 10% the next, it also is not back to even. It has decayed 1%"

Only if you sold it.

A stock doesn't decay. The price of the stock is always the price of the stock. Your return is whatever you sell it at minus whatever you bought it for, regardless of any volatility in the price.

The problem with these ETFs is that they don't hold their positions. Every day they reset. In other words, they are directly exposed to the daily volatility of their underlying assets. That's where the decay happens. The more volatility in day to day price, the worse the decay gets.

Normal index tracking ETFs don't suffer these issues much since most of them don't rebalance that often. But any ETF, or more to the point, any investment strategy that moves in and out of the market "quickly" will end up suffering from decay if they aren't exceptionally careful. And since these ETFs operate "blindly" (no active management) then they will undoubtedly bleed dry over time, especially in markets like we've been having lately.

~X~


On Jul 13 12:40 PM widestrides wrote:

> But wouldn't ANY volatile stock be subject to the same "decay?" If
> a biotech stock goes up 10% one day and down 10% the next, it also
> is not back to even. It has decayed 1%.
>
> So it is the volatility that creates the danger, and true these leveraged
> ETFs are leveraged by design, but they aren't necessarily volatile.
> True, they have been this past year, but this has been a volatile
> year and a "perfect" storm to decay these ETFs. But if they trend
> your way or if you "rebalance" them yourself, you can take the decay
> out of them.
>
> GL

Jul 13 02:57 PM

[Lawrence Si...:]

So why aren't smart traders with enough capital simply shorting ALL these ETF's? I have a test portfolio doing that at Updown and it's moving up very well, 75% per yr so far..

I found the decay through Excel analysis also, and realized that smart people like GS are likely laughing as they short these, selling to "investors"..

Am I missing something - are the funds NOT shortable? then you can simply sell calls on them all, right?

Jul 13 03:34 PM

[Kanman:]

It's funny. There so many folks (and it has become so popular) to slam these ETFs. I can only speak from personal experience. I bought DIG in Jan... it went up and down like you would expect. After 6 months (yes, 6 months!) it hit my very sweet target. Since then I've been in and out for a week or less twice, and it has worked out perfectly. 3 for 3. There's nothing wrong with leveraged ETFs if you know your entry and exit strategy.

Jul 13 03:57 PM

[Kanman:]

To put it another way; if you want the bonus of the leverage (2x or 3x), you're going to have to put up with some risk. Name another product with such potential upside??? Anyone? If you are not risk averse, these are great products. Like any investment, you need to understand the vehicle before you drive it.


On Jul 13 03:57 PM Kanman wrote:

> It's funny. There so many folks (and it has become so popular) to
> slam these ETFs. I can only speak from personal experience. I bought
> DIG in Jan... it went up and down like you would expect. After 6
> months (yes, 6 months!) it hit my very sweet target. Since then
> I've been in and out for a week or less twice, and it has worked
> out perfectly. 3 for 3. There's nothing wrong with leveraged ETFs
> if you know your entry and exit strategy.

Jul 13 04:03 PM

[kkerr:]

Anything that tracks something else by a multiple greater than 1 will experience decay. It is due to simple math. The whole rebalancing fees/costs is a different issue. The majority of the decay is from the math and the leveraged ETFs properly tracking on a daily basis, not the fees and expenses.

Jul 13 04:18 PM

[kkerr:]

Shorting a bull ETF is still dangerous because in a strong enough uptrend with low volatility, leveraged bull ETFs can have significant gains. Thus, the short will be crushed.

Jul 13 04:20 PM

[fjpenney:]

There is no shortage of articles written about leveraged ETF decay but, as was noted by User 243258, the returns generated by leveraged ETF's are path dependent. Here in Canada, Horizons Beta Pro reps have made that point clear whenever they appeared before the media.

Lawrence:
You make an excellent point - if the decay is so certain, why not short the leveraged ETF's. I tried to short QLD through my Canadian broker but was advised that they didn't have any QLD and that it was very difficult for them to offer any of the US ETF's for shorting. I'd like to hear from others on this.

I use the leveraged ETF QLD (Proshares Ultra QQQ) in conjunction with my own timer and am pleased with the results. The volatility is definitely not for everyone.

Jul 13 07:34 PM

[Marco Hickey:]

Write deeper in the money call options. You'll be protected on the downside with the premium you receive, and just hope the market doesn't rally too much, as if you don't get called out your likely to return a gain. Writing for longer option expiration's may be tempting, but in my opinion writing for the shorter term (for the upcoming expiration) pays more over the course of your position and is less risky as well. If you need help with options check out the E-Book I wrote or visit: optionmaestro.blogspot...


On Jul 13 07:34 PM fjpenney wrote:

> There is no shortage of articles written about leveraged ETF decay
> but, as was noted by User 243258, the returns generated by leveraged
> ETF's are path dependent. Here in Canada, Horizons Beta Pro reps
> have made that point clear whenever they appeared before the media.
>
>
> Lawrence:
> You make an excellent point - if the decay is so certain, why not
> short the leveraged ETF's. I tried to short QLD through my Canadian
> broker but was advised that they didn't have any QLD and that it
> was very difficult for them to offer any of the US ETF's for shorting.
> I'd like to hear from others on this.
>
> I use the leveraged ETF QLD (Proshares Ultra QQQ) in conjunction
> with my own timer and am pleased with the results. The volatility
> is definitely not for everyone.

Jul 13 08:32 PM

[SD11:]

The article inspite of data, does not have some relevant data.
1. Why make up cases, when you can actual get ups and downs from the market in the past? A better case is to take months from last 12, say Feb-Apr and so forth
2. For short term, inspite of decay, they work well as long as one is not hung up on exact double, etc. QLD has YTD return of 30.53, QQQQ has 17.75.

Jul 14 02:46 AM

[Kanman:]

Post Script:

My net is +34% using leveraged ETFs in half a year. Tracking the underlying index (^DJUSEN) I would have only made 18%. This is significant considering the number of shares involved. Again; the leverage is an incredible tool if used with knowledge, and with a safe exit strategy. Leverage comes with a cost.


On Jul 13 04:03 PM Kanman wrote:

> To put it another way; if you want the bonus of the leverage (2x
> or 3x), you're going to have to put up with some risk. Name another
> product with such potential upside??? Anyone? If you are not risk
> averse, these are great products. Like any investment, you need to
> understand the vehicle before you drive it.

Jul 14 09:27 AM

[Kanman:]

SD11, you are correct.

I've tracked these numbers closely using both theoretical and actual trades. The leveraged ETFs - even over time - are doing (within reason) very close to what they are supposed to. This "decay" talk is interesting, and good to know. But using actual performance, these funds are surprisingly robust, even when they get hammered and come back. Over a 6 month period, I had one ETF that was down almost 50%. It rebounded on a percentage basis exactly the way it should.


On Jul 14 02:46 AM SD11 wrote:

> The article inspite of data, does not have some relevant data.<br/>1.
> Why make up cases, when you can actual get ups and downs from the
> market in the past? A better case is to take months from last 12,
> say Feb-Apr and so forth
> 2. For short term, inspite of decay, they work well as long as one
> is not hung up on exact double, etc. QLD has YTD return of 30.53,
> QQQQ has 17.75.

Jul 14 12:30 PM

[DrBenway:]

I think a lot of of the posters here completely miss the point. These ETFs are simply path dependent because of the simple compounding.

They will outperform the benchmark in the steady uptrend and downtrend (double-bull in the steady bull-market and double-bear in the steady bear market) and will underperform ("decay") in the sideways, mean-reverting market.

For some of you who want to naively short both long and short ETF, thinking it is free money, just think what will happen to you position in a steady bull or bear market:

Let's take an extreme example to demontrate the point: \

you shorted double-leveraged ETF bull and bear of S&P500 by selling $100 worth of each ETF (just for simplicity sake):

S&P 500 goes up 1% every day for 100 days =>

S&P short bull loss = -$100*(1+0.01*2)^100 = -$724.5
S&P short bear gain => close to 0, so let's assume $100 maximum possible gain (it will be something like $5 in real terms).

You end up -$624 at the end. Get the point?

Jul 14 11:38 PM

[ptran:]

The stock market does not go up/down in a straight line. There will be a pause and break from the up/down trend, which will produce decay in the ETF's. If possible, shorting both bull and bear ETF's is the way to go.

> S&amp;P 500 goes up 1% every day for 100 days =>
> You end up -$624 at the end. Get the point?

Jul 15 01:04 PM

[Kanman:]

Thank you. Well, and clearly put.


On Jul 14 11:38 PM DrBenway wrote:

> I think a lot of of the posters here completely miss the point. These
> ETFs are simply path dependent because of the simple compounding.
>
>
> They will outperform the benchmark in the steady uptrend and downtrend
> (double-bull in the steady bull-market and double-bear in the steady
> bear market) and will underperform ("decay") in the sideways, mean-reverting
> market.
>
> For some of you who want to naively short both long and short ETF,
> thinking it is free money, just think what will happen to you position
> in a steady bull or bear market:
>
> Let's take an extreme example to demontrate the point: \
>
> you shorted double-leveraged ETF bull and bear of S&amp;P500 by selling
> $100 worth of each ETF (just for simplicity sake):
>
> S&amp;P 500 goes up 1% every day for 100 days =>
>
> S&amp;P short bull loss = -$100*(1+0.01*2)^100 = -$724.5
> S&amp;P short bear gain => close to 0, so let's assume $100 maximum
> possible gain (it will be something like $5 in real terms).
>
> You end up -$624 at the end. Get the point?
>
>
>

Jul 15 01:43 PM

[Zottek:]

You can look at the period between July 13, 2006 - July 13, 2007, to see a demonstration of a period in which shorting both will lose money. In this period S&P500 went up from 1242 to 1552 (almost 25%). The SSO (double leveraged ETF) followed it closely and went up 50.2% - as expected. However, the SDS (double-short leveraged ETF) lost only 30.5%, so not only there was no decay, the combined value actually went up. Shorting the 2 ETFs would have resulted in a loss of over 11%. If you look at the S&P500 graph for that period, you can see that the index went through a very steady up-trend with very little volatility.
However since then, in the last 2 years, as the market was very volatile, shoring both ETFs would have resulted in a gain of 12.3% Jul 2007-Jul 2008, and a 28% gain in Jul 2008-Jul 2009.

Zottek

On Jul 15 01:04 PM ptran wrote:

> The stock market does not go up/down in a straight line. There will
> be a pause and break from the up/down trend, which will produce decay
> in the ETF's. If possible, shorting both bull and bear ETF's is
> the way to go.

Jul 15 06:35 PM

[mwfall:]

THE AUTHOR IS 100% WRONG. HIS ARTICLE IS WORTHLESS AND HE'S A MATH DUNCE.

HERE'S HIS MISTAKE:

take the triple levereged one.
when it goes from 100 to 70 the percentage loss is calculated by dividing 30 into 100 equals 30% (he was right on that one)
when it goes from 70 to 100 the percentage gain is calculated by dividing 30 into 70 equals 42.85% gain !!

Jul 15 08:58 PM

[mwfall:]

you should post a new article explaining your mistake for all the people that read your false mis-information.

Jul 15 09:04 PM

[User 449236:]

ANALYSIS IN THE ARTICLE IS FLAWED - While the author intended in good faith to inform, the result is misinformation.

Each ETF management company publishes how their ETF works in the initial prospectus filed. See Edgar/Sedar or company website (for example direxionshares.com/etfs) They explain in detail why decay exists as well as how much to expect per year based on things like volatilaty and rebalancing or moving to a different futures month. Their calculations/analysis are bang on and show that decay can be 20-60% per year in a sideways market.

Then you can decide if the short term potential gain is worth the long term decay.

Jul 16 04:33 PM

[19709:]

You obviously did not read the article closely enough. The author was saying that if the index fell to 900 and the 3X fell to 700 an 11.11% increase in the index back to 1000 would not be sufficient to return to 3X to 1000. It would take an increase of 14.283% in the index equivalent to an increase in the 3X of 42.85% to return the 3X to 1000. While your math is OK, your reading comprehension is not.


On Jul 15 08:58 PM mwfall wrote:

> THE AUTHOR IS 100% WRONG. HIS ARTICLE IS WORTHLESS AND HE'S A MATH
> DUNCE.
>
> HERE'S HIS MISTAKE:
>
> take the triple levereged one.
> when it goes from 100 to 70 the percentage loss is calculated by
> dividing 30 into 100 equals 30% (he was right on that one)
> when it goes from 70 to 100 the percentage gain is calculated by
> dividing 30 into 70 equals 42.85% gain !!

Jul 20 01:06 PM

[TeeRoy:]

That was my idea as well...seems like a no brainer..to short it...maybe write a covered put as well.


On Jul 15 06:35 PM Zottek wrote:

> You can look at the period between July 13, 2006 - July 13, 2007,
> to see a demonstration of a period in which shorting both will lose
> money. In this period S&amp;P500 went up from 1242 to 1552 (almost
> 25%). The SSO (double leveraged ETF) followed it closely and went
> up 50.2% - as expected. However, the SDS (double-short leveraged
> ETF) lost only 30.5%, so not only there was no decay, the combined
> value actually went up. Shorting the 2 ETFs would have resulted in
> a loss of over 11%. If you look at the S&amp;P500 graph for that
> period, you can see that the index went through a very steady up-trend
> with very little volatility.
> However since then, in the last 2 years, as the market was very volatile,
> shoring both ETFs would have resulted in a gain of 12.3% Jul 2007-Jul
> 2008, and a 28% gain in Jul 2008-Jul 2009.
>
> Zottek
>
> On Jul 15 01:04 PM ptran wrote:

Jul 22 04:55 PM

[User 462011:]

The premise of this article is ludicrous in promoting some kind of "decay" scenario. I'm afraid you've over analyzed in looking for something that's just a function of the numbers & not leverage. You should really delete anything published that promotes this idea because it just isn't true.

Jul 28 02:59 AM

[investorcluzo:]

"As you can see the net gain for the index was 5.87%, however all 4 of the leveraged ETFs did not perform as they were suppose to."

the etfs performed exactly as advertised - 2x or 3x the DAILY move of the selected index. these are not buy and hold securities (as you stated). I am not challenging your premise of decay over the long run (esp. if you believe in mean reversion), but let's not blaspheme these instruments which can be useful.

Aug 13 06:09 PM

[Tgarfield:]

You do not show the rebalancing losses. That is the pain in volatility. Add them in and you get different answers.

Sep 05 10:34 AM