Tristan Yates

Leveraged ETF Performance YTD

Why write the same comment in three different threads?

Volcker's Capital Idea: Getting Back to Real Banking

Is the old Volcker back? And will Obama let him fix the system?

As Unemployment Grows, Tech Jobs Hang On

This recession is hitting lower-skilled workers primarily. The unemployment rate for college grads is 4.1%.

Defending Financial Journalists - and Bloggers

You can't expect financial journalists to accurately predict next year's S&P 500 level. However, they should be able to detect fraud.

In Defense of Leveraged ETFs

Mark, I hope you don't mind the debate. As a writer I get lots of positive and negative feedback on my articles and always enjoy it because it means my ideas are out there. I probably helped inspired your article and I'm happy to have done so. Good luck with your research and writing.

In Defense of Leveraged ETFs

Quick quiz:
1) If the S&P 500 falls 15%, what percentage increase do you need to recover your losses?
2) Now calculate the same for a double and triple leveraged ETF.
3) If you trade $20,000 of SSO every day and it has a built in 7% expense ratio, calculate how much you would save over a year if you switched to index futures with their built in broker margin rate of under 2%.

In Defense of Leveraged ETFs

I wrote the initial article: "The Case Against Leveraged ETFs". Since then I've done more writing and analysis, and the latest is here:

www.tradingmarkets.com...

I also contributed to some of the recent Larry McDonald articles which are very good.

The take aways:
1) the cumulative product of doubled daily returns will almost certainly be lower than the underlying returns because its harder to recover from a doubled loss than the loss itself.
2) you have to pay very close attention to your index exposure because it can very quickly get out of control, making your risk exposure rise and fall dramatically
3) they have a *monster* cost of capital & expenses built in that's simply indefensible - like 7% a year.

Bottom line: Leveraged ETFs are for amateurs. If you want leverage, use options or futures or even margin (with a decent broker) like a professional.

Understanding Levered ETFs and Geometric Returns

Leveraged ETFs have a monster cost of capital built in that you can calculate by doubling the SPY return and subtracting the SSO return - it's about 7.1%. FYI I'm writing an article for Trading Markets on their 2008 performance and what investors can learn from it in terms of managing portfolios.

Direxion's Andy O'Rourke Talks Triple Leverage

It will ultimately underperform the market, just like SSO.

Are Index Funds the Only Rational Choice?

Good article. The S&P 500 is a decent benchmark but is considerably antiquated as an investment portfolio. The outperformance of small cap and value stocks has been known for 40 years and the effect of momentum was studied extensively in the 80s and could be considered another factor. There is also a liquidity premium (low liquidity investments have higher returns) and very likely a volatility premium. (This is distinct from the implied/historic volatility premium that exists in the options market.)

I recommend reading Fama & French's 2007 paper "migration" and his related 2008 paper that investigates the source of the value and size premiums.

Thanks,
Tristan Yates
Author: Enhanced Indexing Strategies

Leveraged ETF Debate Hits the Mainstream

Not enough money in leveraged ETFs to move the market, especially considering the daily rebalancing effect is only a fraction of the value of the fund.

Investors Aren't Efficient Shoppers

I guess the problem is we're asking millions of people to become their own portfolio managers and they have no training whatsoever.

Ultra and Inverse ETFs: The Downside of Doubling Up

Thanks for the reference, I appreciate it. I'm working on a book on Enhanced Indexing which has some further analysis on leveraged ETFs. Feel free to contact me with questions or for additional analysis. I'll just add one thing here - check the price of SSO and the SPY in July 2006 and today and you can see that the leverage (or actually the leverage and associated reinvestment strategy) actually destroyed value rather than added it during the 21 month period, even though the S&P itself returned well above any imagined cost of capital.

Fed's Folly: Fooled by Flawed Futures?

When over $1T of S&P 500 wealth is wiped out in two weeks and another $1T is on the way given the overseas losses and the futures, that's an economic reality you can't ignore. The Fed has a mandate to provide stability to the system, and the way it was going on tuesday, trading probably would have been halted multiple times that day. BB didn't know about SocGen, and regardless, I don't think a single market participant could have triggered the panic we saw.

If 'Real Journalism' Fails As A Business, Should Government Step In?

The BBC is publicly funded and is one of the world's best news gathering organizations. However, it is much too soon to declare journalism dead obviously. Print perhaps, but then the model will change to television + internet + free lightweight paper, and perhaps that's more efficient.