Tristan Yates and Lye Kok (IndexRoll) submit: The Constant Leverage Trap is a well-known problem in financial modeling. Attempting to maintain a constant leverage ratio in a portfolio over a long period of time will eventually lead to the portfolio selling off almost all of its assets in the worst of market conditions. This problem was largely academic until recently, when two companies, ProShares and Rydex launched a set of leveraged ETFs that seek to track double the return of the S&P 500 Index.
The leveraged ETFs are: ProShares Ultra QQQ ETF (QLD), ProShares Ultra S&P500 ETF (SSO), ProShares Ultra MidCap400 ETF (MVV), ProShares Ultra Dow30 ETF (DDM), ProShares Ultra Russell2000 ETF (UWM), ProShares Ultra SmallCap600 ETF (SAA), ProShares Ultra Russell1000 Value ETF (UVG), ProShares Ultra Russell1000 Growth ETF (UKF), ProShares Ultra Russell MidCap Value ETF (UVU), ProShares Ultra Russell MidCap Growth ETF (UKW), ProShares Ultra Russell2000 Value ETF (UVT), ProShares Ultra Russell2000 Growth ETF (UKK), ProShares Ultra Basic Materials ETF (UYM), ProShares Ultra Consumer Goods ETF (UGE), ProShares Ultra Consumer Services ETF (UCC), ProShares Ultra Financials ETF (UYG), ProShares Ultra Health Care ETF (RXL), ProShares Ultra Industrials ETF (UXI), ProShares Ultra Oil & Gas ETF (DIG), ProShares Ultra Real Estate ETF (URE), ProShares Ultra Semiconductors ETF (USD), ProShares Ultra Technology ETF (ROM), and the ProShares Ultra Utilities ETF (UPW).
The mechanics of maintaining constant is trivial. At the beginning of the market day, hold a portfolio of equal proportions equity and debt. At the end of the day, if the market has gone up, the fund will have more equity than debt, so it buys additional shares. If instead, the market went down, the fund sells shares. This is called daily rebalancing.
Intuition says that this is likely a bad investing strategy. Buying every time the market climbs and selling
