ProShares Ultra Utilities (UPW)

All Comments on UPW

  • commenter
    Josh Stern
    May 18 12:28 AM
    The Case Against Leveraged ETFs [view article]
    Re Rydex:
    So far SSO is underperforming Rydex Dynamic S&P. It seems like both the redemption factor with mutual funds and the creation factor with ETFs complicate things, making me wonder whether a traditional closed end fund 2X fund wouldn't make more sense.

    Re: percentage of NAV in options/futures. Even if it was only 5% at a time, since the cost of borrowing is embedded in the bid/ask spread, we need to know the annual turnover percentage of the derivative position to figure out how it effects the annual cost percentage of the ETF. Consulting Morningstar for the Rydex Dynamic S&P 500, they list the cash percentage for RYTNX as 9.4 %, the annual asset turnover as 19%, and the expense ratio as 1.69%, but it's not clear exactly what those first two stats mean.     Reply
  • commenter
    Timothy
    Collins
    May 17 10:53 PM
    The Case Against Leveraged ETFs [view article]
    I've talked with some folks from Rydex, and I think Roger is close on the amount of cash they actually use to get the leverage, and it appears to fall between 5 and 10%, but I need to revisit the prospectus to see if it is spelled out. I think another huge concern is the tax bite. SSO distributed over $3 per share cap gains last year and MVV distributed almost $5 per share. I don't want 3 to 6% of my client's money coming out as short term cap gains each year, and what happens in a volatile year that goes up and down, and winds up down. You could still wind up with huge short term cap gains on a down position, so it is tough to use these in a taxable account unless you diligently tax harvest. One strategy I did use with these was to follow up with bi-weekly target rebalance. Therefore, if one rose too far (ie. became either 10%, 13%, 16.4%, or 20%) overweighted, I would sell to bring the asset allocation back into alignment. Furthermore, when an asset class fell a certain percentage below it's targeted asset allocation amount, I would then add to the position. It is actually inverse to what the fund itself is doing. I found that this helped to smooth returns a bit. Yes, it is somewhat labor intensive, but using a low cost firm like Interactive Brokers, which allows global client trades, costs were kept to 20 cents to $2 per trade (yes, you read that correctly).
    Enjoy the discussion. Keep it up.     Reply
  • commenter
    Roger
    Nusbaum
    May 17 07:14 PM
    My Website
    The Case Against Leveraged ETFs [view article]
    amounts to 5% of the small portion not in t-bills? Reply
  • commenter
    Tristan
    Yates
    May 17 06:55 PM
    My Website
    The Case Against Leveraged ETFs [view article]
    Exactly - the financial derivatives they use has a built in cost of capital and the investment gains are reduced by exactly that amount.

    For example, today the closing futures price for the S&P 500 for June is 1518.80. But today's S&P price is 1512.75. The difference represents a cost of interest, and if you calculate that cost on an annual basis, you'll get something close to 5%. Or the fund might just buy a swap - at settlement date they exchange the gains in the S&P 500 for the accumulated interest on a short-term bond that pays 5%. It all amounts to the same thing.

    I agree that's its confusing, and I did struggle with that section for a while, trying to do a better job of explaining it.     Reply
  • commenter
    Josh Stern
    May 17 01:04 PM
    The Case Against Leveraged ETFs [view article]
    Re: Relation to interest rates -
    In order to profit from opening an options contract, a trader has to either exercise the option or close the contract. In the former case they need a lot of capital to do that. In the latter case they are paying the bid/ask spread. So current borrowing costs are factored into the bid/ask spread.

    Re: Portfolio insurance -
    Long term maintenance of synthetic option positions is clearly too complicated and not cost effective for retail investors. But I wonder why brokerages, especially electronic ones, don't offer user-friendly portfolio insurance to their clients based on synthetic option positions. They could charge X$ to open plus Y%/month to maintain. I bet it would be a money maker for them both in terms of direct fees and encouraging higher levels of investment participation from nervous investors and ones with shorter time horizons until they made need the money.     Reply
  • commenter
    Roger
    Nusbaum
    May 17 11:55 AM
    My Website
    The Case Against Leveraged ETFs [view article]
    which equates to the number days left until maturity of the current 91 day t-bill I believe? So are we talking about a small drag on a small slice of the fund?

    The mis conception about long-term versus daily would seem to be much more important. Just my take.     Reply
  • commenter
    bobbyjoe
    May 17 11:26 AM
    The Case Against Leveraged ETFs [view article]
    Although they may not be "borrowing" funds from the bank, the derivatives serve the same purpose and they have a cost also - the premium. The premium can be equated to the cost of borrowing because it is the cost of gaining the leveraged exposure. Reply
  • commenter
    bobbyjoe
    May 17 11:24 AM
    The Case Against Leveraged ETFs [view article]
    Very good article that brings many of the lesser-known issues to the forefront.

    The issues you address are becoming more significant as ETFs are marketed to retail investors. I fear that uninformed retail investors are buying these ETFs that are marketed to boost returns. They'll eventually get burned and the only people coming out ahead will be the traders who used the ETFs intelligently and the firms that market them.     Reply
  • commenter
    Josh Stern
    May 17 10:58 AM
    The Case Against Leveraged ETFs [view article]
    This is a well written article which I enjoyed even though I was already familiar with most of the concepts and material. I'm also a software guy at heart and appreciate an analytical approach to these topics. Reply
  • commenter
    Roger
    Nusbaum
    May 17 10:55 AM
    My Website
    The Case Against Leveraged ETFs [view article]
    The mis-conception that these funds capture twice the index over the long term is huge huge huge, I agree that a lot people miss that.

    I use the double short SPX, ticker SDS, in a small amount as an insurance policy and I concede the long term flaws you cite that may leave investors disappointed with results.

    There are a couple of things in your article that I don't quite follow. The 2x funds are mostly cash invested in T-bills earning around 5%, they don't borrow anything, as I understand it they are something like 90% cash. Yes there is perpetual tweaking to maintain the right mix.

    I have used SDS for quite a while and last December clients got a fairly healthy dividend on the t-bills.

    I do not disagree with you on the flaws but as a small insurance policy is was a big help on 2/27.     Reply
  • commenter
    rkaydanian
    Apr 30 04:30 PM
    Leveraged ETFs: A Value Destruction Trap? [view article]
    Tristan, I like to thank you for the article, you explained the problem that we will face with these ETF's clearly and you offered what could be a solution by DCA 3% annually and I know 3% that you mentioned is not a magic number. Since these funds buy more shares as the underlying index trades higher and sell shares as it drops what do you think of using Bollinger bands and rebalance your position as it hits the upper and lower bands. Technically this will force you to sell when the price trades higher rapidly when it hits the upper band and buy more shares when prices decline rapidly when it hits the lower band.
    Thanks in advance for your thoughts. Rob     Reply
  • commenter
    David
    Jackson
    Apr 16 08:16 AM
    My Website
    Leveraged Sector ETFs [view article]
    Have we missed out any ETFs here? Or any Seeking Alpha articles that are important to understanding them? If so, please leave a comment and let us know! Reply
  • commenter
    beidlerp
    Apr 04 07:46 PM
    Leveraged ETFs: A Value Destruction Trap? [view article]
    I find this article very interesting. It sounds to me as if one would NOT want to use leveraged ETFs in a long-term buy-and-hold portfolio because of the significant down-side risk. Rather, these ETFs would be used for short-term plays. You'd want to wait for, say, a February 28th, buy in, and look for a good time to get out. Am I wrong?

    Question: Let's say you feel good about the market on February 28th--you know it's coming back You buy 100 QLD or something, and lets say the index is back up to record levels 2 months later. Index up 10%, QLD up (say) 18%. You expect either a sloppy market or another correction. Do you sell and go into an index, or do you buy the double short nasdaq fund?     Reply
  • commenter
    David
    Jackson
    Apr 03 04:23 PM
    My Website
    Leveraged ETFs: A Value Destruction Trap? [view article]
    Surely if you buy the leveraged short ETF then you'll get caught in the constant leverage trap that you describe. So it's better to short the leveraged long ETF, no? That way the constant leverage trap works in your favor. Reply
  • commenter
    Tristan
    Yates
    Apr 02 11:21 PM
    My Website
    Leveraged ETFs: A Value Destruction Trap? [view article]
    Thanks for your comment. When you review the prospectus of one of these funds it mentions that a +10% daily rise in the fund followed by a -10% drop will result in a -4% total drop rather than -1% if you owned the index. That validates the share buying/selling computations that we used in the model.

    I agree with you that they most likely do use a combination of index futures and T-bills, but when the futures go up, your leverage ratio will go down and when the futures go down, your leverage ratio will go back up, and you're still stuck rebalancing - either buying more futures or selling more futures. The effect is the same.

    However, you're correct that we don't know the exact cost of debt. We just used the broker rate of options, which is about 5% right now, and yes, having money in T-bills could make that cheaper. But there is also high expense ratio too that we didn't model.

    Anyway, check out the UOPIX chart also and see what you think.     Reply
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