Kevin Stecyk

Leveraged ETFs: Handle with Care

On Mar 24 08:59 PM Vanderpool wrote:

> This is the best article about these funds I have read yet... Thanks
> Kevin for the effort.

My pleasure.

Still I have some questions...
> What I do not understand is what effect do they have on your holdings
> if you stay in them overnight. Do they open up the next morning compensating
> for any plus or minus action that occurred since closing the previous
> day?

My understanding is that they do compensate for any plus or minus action that occurred since the previous day. So in other words, if the markets open up big the following day, your 2x ETF should reflect that when trading begins.

You would have to read the prospectus of the ETF in question, but my *guess* is that most of these ETFs use a few stocks/futures/options during the day to keep the ETF tracking the underlying asset. And then toward the end of the trading day, they attempt to "true up" the ETF by using a more comprehensive suite of assets.

Some speculate that the wild trading that often occurs in the last hour is attributable to these ETFs.

> Can they be used at all to protect you from overnight swings in the
> market?

I suppose if your portfolio had a beta of 1.0 (or pick any value) and you went with a negative 2X (or whatever value) S&P ETF, it would help flatten your exposure.

That said, these ETFs do experience tracking errors.

> If not, how do you trade in these if you have a long term perspective
> on where the market is headed? (In them in the AM and close out
> in the PM? Everyday until your market expectations change?) How
> do you capitalize on their potential to out perform?

If you believe that the market is headed up (or down), go ahead and buy a triple ETF. Just recognize that volatility will eat away at your returns. So if you have a strong few days and expect the next week to be choppy, sell.

Or buy the ETF in the AM. Ride the ETF throughout the day and sell before closing. In the morning, assess whether you believe that the day will be another winner. If so, buy again. If not, stand aside.

It's the volatility that will eat away at your returns. If you believe that you are about to enjoy several days in a trend, go ahead and try to capitalize on that.