Balaji Viswanathan

Explaining Inverse and Leveraged ETFs

Daniel,
I have tried a few times shorting SKF and it worked for me better than going long in UYG. A couple of times, I went short in both UYG and SKF and exploited arbitrage opportunities during the period of heavy volatility in September. But, then after the short ban from SEC, I found this strategy tough. I then focused a bit on shorting DIG.

These days I'm avoiding UYG altogether and playing only with SKF - if I want to short it, I buy puts, and if I want to long - I sell puts.

Explaining Inverse and Leveraged ETFs

SolarBear:
Feel free to translate, as long as you attribute the source and link to the SeekingAlpha page.

The 50% upside is an interesting question. It depends on whether the 50% down happens in one moment (market closes at 10K and reopens at 15K) or it happens in sequence of steps over a long period of time. Ideally the ETF would have a curve resembling 1/x and hence would not go to 0. Just on the upside, it will be decelerating on the downside too if the market goes up slowly. Take a look at DUG when oil doubled from 2007 to summer 2008.


On Nov 09 04:49 PM SolarBear wrote:

> Hi Balaji,
>
> Thanks for your explaining. One question for the inverse ETFs, what
> if the index rallys up more than 50%? Although it's kind of impossible,
> after 3xETFs appear, maybe we can see something very "insteresting&...
> I just wonder if the NAV of the inverse ETFs (even leveraged ETFs)
> could be negative due to the huge volatility of the stock market.
> Thanks.
>
> By the way, I am thinking about translating some good articles into
> Chinese and post it on my blog. May I quote your articles in my
> blog?

Explaining Inverse and Leveraged ETFs

Barg:
1. DXO is an ETN and these have a slightly different behavior from ETFs. ETF is a fund with a Net Asset Value, so you could theoratically liquidate the fund and pay out its holders with that value. ETN is like a bond where the issuer will try to match up the returns of the underlying index, so it depends on the credit worthiness of the issuer, not just on the underlying.

2. ETF prices are controlled by the market forces and kept in line by their market markets who can issue new stocks or redeem existing ones when buyers or sellers increase, with layers of transactions beneath them. Also the arbitragers keep working on to maintain the price levels tracking the underlying by shorting or going long as necessary.

Yahoo finance has an introduction to ETF:
finance.yahoo.com/etf/...

Explaining Inverse and Leveraged ETFs

Hi Juan,
You are correct. That was a slip from me. However, when I drew the graph for XLF and IYF they lost the exact same amount in the last 8 years and have been moving lockstep the last 6 months. Overall the margin of error was just around 1%. So, that doesn't change the numbers here, but still should have been clarified.