David Fry's  Instablog

Leveraged issues have been the subject of great controversy. Some believe, mistakenly in our opinion, short leveraged products particularly were in some ways responsible for enhancing stock market declines during the 2008 bear market. These views are mistaken since there were many other products (options and futures) that allowed investors to short major market indexes.

Critics suggest that since there was and is no "uptick" rule for shorting this enhanced market declines. But, all one had to do was watch a live market streaming tape during the worst of the declines and you would see plenty of upticks with the decline.

Also, critics are more correct to point to presumed tracking inefficiencies. A typical investor would complain after buying one of these products and see a few months later they didn't match the expected two or three times the index or ETF. This was primarily due to longer holding periods when periods of high periods of volatility persisted combined with compounding problems given daily tracking methodologies used by sponsors. We've written more about this in this article.

One thing remains clear when dealing with leveraged issues of all types-they must be traded and used tactically. They're not "buy and hold" products, but then neither are alternative products like options or futures. Investors wishing to participate in these issues must understand the higher risks associated with these including tracking issues cited above. Investors must be sophisticated and experienced in their dealing employing strategies to mitigate higher risks associated with these products.

We have found that successfully dealing in these requires a technically-based approach.

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