Leveraged ETFs Decay Dashboard

| About: VelocityShares 3x (DGLD)

Summary

1-month and 1-year decay of the main 3x leveraged ETFs, regular and inverse.

An interpretation of extreme cases.

This is the first issue of a monthly Leveraged ETF Decay Dashboard.

After positive feedback on "The Real Cost Of Hedging With Leveraged ETFs," I decided to launch a new article series featuring a dashboard of 3x leveraged ETFs decays.

For whom is this?

It is for any investor or trader using leveraged ETFs to take exposure in an asset sub-class or to hedge a portfolio. Articles will be quite repetitive: a reminder for understanding, a big table of numbers and a conclusion. The changing elements are the numbers and the conclusion. You will see, at a glance, the returns and decays on the trailing month and the trailing year. These data may be useful to detect expensive trades and hedges, and take decisions if you think the same market conditions will go on. If you don't want to miss the next issues, you can click "Follow" at the top of this article right now.

What is the decay?

Leveraged ETFs usually do worse than leveraging the underlying assets with the same factors. Underperformance has several reasons: beta-slippage, management fees, tracking errors, derivatives structure (future contracts, options). Beta-slippage is usually the major one for 3x leveraged ETFs. You can read here detailed explanations about it. Futures rolling costs (abusively and commonly called contango) may become prominent for some commodity ETFs. In fact, the decay is not always one: in rare cases, leveraged ETFs provide an excess return over the leveraged underlying asset. This is why it will be named "drift" hereafter, decay standing for negative drift.

Trailing Monthly and Yearly Drifts on 5/18/2016

In the next table, "ETF Drift" is the ETF return minus the index return multiplied by the leveraging factor. "Trade Drift" is the ETF Drift divided by the leveraging factor absolute value. It is the drift relative to the same exposure in the non-leveraged index. A month is averaged at 21 trading days, a year at 250 trading days.

Index

Ticker

1-month return

1-month ETF Drift

1-month Trade Drift

1-year return

1-year ETF Drift

1-year Trade Drift

S&P 500

SPY

-2.10%

0.00%

0.00%

-1.72%

0.00%

0.00%

UPRO

-6.51%

-0.21%

-0.07%

-14.25%

-9.09%

-3.03%

SPXU

5.95%

-0.35%

-0.12%

-10.96%

-16.12%

-5.37%

ICE US 20+yr T-bond

TLT

0.24%

0.00%

0.00%

13.48%

0.00%

0.00%

TMF

0.13%

-0.59%

-0.20%

35.69%

-4.75%

-1.58%

TMV

-1.22%

-0.50%

-0.17%

-40.76%

-0.32%

-0.11%

Nasdaq 100

QQQ

-5.17%

0.00%

0.00%

-3.08%

0.00%

0.00%

TQQQ

-15.17%

0.34%

0.11%

-20.58%

-11.34%

-3.78%

SQQQ

16.28%

0.77%

0.26%

-13.41%

-22.65%

-7.55%

DJ 30

DIA

-2.35%

0.00%

0.00%

-1.78%

0.00%

0.00%

UDOW

-7.32%

-0.27%

-0.09%

-14.07%

-8.73%

-2.91%

SDOW

6.74%

-0.31%

-0.10%

-10.12%

-15.46%

-5.15%

Russell 2000

IWM

-3.56%

0.00%

0.00%

-11.39%

0.00%

0.00%

TNA

-10.78%

-0.10%

-0.03%

-38.91%

-4.74%

-1.58%

TZA

9.94%

-0.74%

-0.25%

11.40%

-22.77%

-7.59%

S&P Select Energy

XLE

2.80%

0.00%

0.00%

-14.18%

0.00%

0.00%

ERX

7.35%

-1.05%

-0.35%

-52.20%

-9.66%

-3.22%

ERY

-9.96%

-1.56%

-0.52%

-5.03%

-47.57%

-15.86%

MSCI US REIT

VNQ

-0.19%

0.00%

0.00%

8.62%

0.00%

0.00%

DRN

-1.53%

-0.96%

-0.32%

13.29%

-12.57%

-4.19%

DRV

-1.18%

-1.75%

-0.58%

-37.22%

-11.36%

-3.79%

ARCA Gold Miners

GDX

15.33%

0.00%

0.00%

28.48%

0.00%

0.00%

NUGT

42.26%

-3.73%

-1.24%

-7.22%

-92.66%

-30.89%

DUST

-43.44%

2.55%

0.85%

-90.43%

-4.99%

-1.66%

MSCI Emerging

EEM

-6.39%

0.00%

0.00%

-22.19%

0.00%

0.00%

EDC

-18.97%

0.20%

0.07%

-61.26%

5.31%

1.77%

EDZ

19.75%

0.58%

0.19%

46.88%

-19.69%

-6.56%

S&P GSCI Oil

OIL

20.75%

0.00%

0.00%

-46.26%

0.00%

0.00%

UWTI

56.08%

-6.17%

-2.06%

-88.90%

49.88%

16.63%

DWTI

-42.46%

19.79%

6.60%

4.15%

-134.63%

-44.88%

Gold spot

GLD

3.80%

0.00%

0.00%

5.29%

0.00%

0.00%

UGLD

11.09%

-0.31%

-0.10%

7.53%

-8.34%

-2.78%

DGLD

-12.12%

-0.72%

-0.24%

-27.29%

-11.42%

-3.81%

Silver spot

SLV

6.42%

0.00%

0.00%

0.24%

0.00%

0.00%

USLV

18.10%

-1.16%

-0.39%

-19.39%

-20.11%

-6.70%

DSLV

-18.61%

0.65%

0.22%

-31.65%

-30.93%

-10.31%

Click to enlarge

Conclusion

The worst decays of the month are in UWTI (long oil) and NUGT (long miners). Energy and REITs leveraged ETFs, long and short, also have a significant monthly decay. They all are based on indices drawing a large swing in the last few weeks. In the case of oil, futures rolling costs add to the decay. The ETFs showing a positive drift this month are on the Nasdaq (long and short), DUST (short miners) and DWTI (short oil). The first case can be explained by a steady downward trend compounding daily returns without large swings. The second and third ones by heavy losses. Except when the daily loss is above 33.3%, the theoretical value of a 3x leveraged ETF doesn't go to zero. Large losses are asymptotic with a positive drift.

In the yearly data, the worst decays are in ERY, NUGT and DWTI, once again because of large swings. Positive drifts are in UWTI and EDC, other cases of large asymptotic losses on a different time scale.

Note of caution: The leveraged ETF decay looks like an invitation to short sellers. Selling short leveraged ETFs has unpredictable risks and costs, as listed in another article.

Don't forget to click "Follow" at the top to be notified of my future dashboard posts.

Data provided by portfolio123

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.