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, Random Roger (164 clicks)
Portfolio strategy, ETF investing, foreign companies
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As a starter for our upcoming live discussion on leveraged ETFs (Thursday at 2pm ET), we asked Roger a few questions regarding these products:
1) How, if at all, do you use leveraged ETFs in your own portfolios?

I have used ProShares Ultra Short S&P 500 (NYSEARCA:SDS) intermittently to hedge client portfolios. The weightings are always small -- initiating positions at 2-3% of the portfolio.

2) Do you see any significant tactical differences in the approaches of the leveraged ETF providers (ProShares, Direxion, Rydex) in terms of composition or methods of capturing the desired return? Do you prefer certain approaches over others?

I prefer using funds covering broad indexes. The daily compounding of the sector products can be very difficult to anticipate and can be very ineffective for hedging purposes. Likewise with the 3X products. The variability along these lines with SDS is, to me, acceptable.

3) Leveraged ETFs have been scrutinized all over for only being appropriate for short-term traders, due to the daily reset and problem of longer-term compounding. This summer, FINRA issued a direct warning to RIAs about the use of these ETFs in longer-term client portfolios. Do you think the leveraged ETF providers have done an adequate job in explaining these products? And do you think they are commonly misused by RIAs? Misused by retail investors?

No idea if they are commonly misused but there have been and always will be people (pros or otherwise) who will misuse products and levered ETFs are no different. Incompetence has always existed, so rules governing use of levered funds won't cure stupidity. People blow themselves up with options all the time, and levered ETFs are actually less risky than options in this regard because levered ETFs do not expire.

4) What are your thoughts on MacroShares' leveraged housing exchange traded products (DMM, UMM)? Are these likely to face the same issues as the MacroShares oil products? If someone has a large percentage of net worth in home equity, would DMM make sense as a hedge against home prices falling?

I wrote about these for TSCM when they first came out. The point I made then, and still believe now, is that in addition to assessing where the index goes, holders also need to assess market expectations of the index. I don't really see the utility in hedging a home's value or hedging an investment property, but for those who do I would think a narrow product tied to where the property is would make more sense. These are not for me.

Source: Roger Nusbaum: Thoughts on Leveraged ETFs