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Cabeza Howe
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Cabeza Howe holds two M.S. degrees in engineering. He has extensive career background in science, engineering and software development. He is a self-made financial analyst and manages his own investment as a business. Focused value investing is his passion. He coined the term... More
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  • UPRO And Leveraged ETFs Are Built For Active Management 2 comments
    Feb 23, 2013 9:46 PM | about stocks: UPRO, SPY, SSO

    Macro Investor deserves credit in pointing out that leveraged ETF UPRO would have performed very well over that last six decades. But I just want to point out that leveraged ETFs, in particular UPRO, is built to be actively managed. It makes little sense to buy and hold.

    My argument can be seen in my comment on his article, repeated below.

    Your argument indeed holds for the past six decades or so. But nobody should take away complacently that S&P 500 is not volatile and as such one can buy and hold UPRO with great peace.

    (1) S&P 500: 1527 on Mach 24, 2000, and 1531 on Feb. 19, 2013. So it finally got back to its original value after almost 13 years. If you have bought and held the imaginary UPRO, however, you would have lost 83% of your investment after the nearly 13 years!

    (2) This is the far-worse part. S&P 500: 1565 on Oct. 9, 2007, and 677 on Mar. 9, 2009. This is the recent financial crisis. S&P lost 57% of value in only 17 months. However, UPRO would have lost 96% of its value. You basically got wiped out during the 17 months period.

    So, regardless of how the world evolves over the long term you would still be much better off actively managing your UPRO position than just buying and holding it. You certainly should get out when market looks frothy; so you can get back in when it is attractively-valued and fear is running rampant.

    Furthermore, as a prudent investor one should be prepared for the possibility that the world has changed a lot due to a multitude of factors. So, the next six decades might turn out to be rather more volatile than the past six. In that case, you might be wiped out holding UPRO or any other leveraged ETF for the long run.

    Themes: Leveraged ETF Stocks: UPRO, SPY, SSO
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  • DonnieT
    , contributor
    Comments (18) | Send Message
     
    There must be a nice way to hold UPRO while hedging against these big downturns. How about buying SPY puts or spx puts? I'm working with a self directed retirement fund so my options are limited. That cheap leverage is hard to pass up.
    9 Sep 2013, 03:30 PM Reply Like
  • Cabeza Howe
    , contributor
    Comments (369) | Send Message
     
    Author’s reply » Hi DonnieT,

     

    Thanks for the comment. I'm surprised but glad that someone actually has read this. Indeed, hedging with SPY/SPX puts appear to be good strategies in an environment like now where a Syria war, Fed tapering, or debt ceiling debacle can easily bring high volatility back to the fore. Maybe we can consider both ATM and OTM puts.

     

    We can also combine that hedging with step-wise reduction of UPRO positions on the way up. We supposedly have built that position at a prior turmoil. And when major resistance level is hit (potential market top based on judgment), fully liquidate UPRO and wait until a correction is in full swing when all the bears are out claiming that a cataclysm is right around the corner to load up huge on it again. On the way down we can also build position gradually over a period of elevated volatility.

     

    Rinse and repeat.

     

    Cabeza
    9 Sep 2013, 09:06 PM Reply Like
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