Xyrus

Leveraged ETF Ban Spreading Like the Flu

To Ryan Freund: The only way you can hold these for weeks or months and expect anything reasonable is in a low volatility trending market. Good luck with that.

In any other market the daily churn will destroy you eventually, as is demonstrated by the chart. So you better have your timing right an KNOW were the market is heading or you're going to be left holding the bag if you're hanging on to these as a long term investment.

And for missing_link:

"Months-long graphs like the ones you show here only prove that you're intentionally trying to mislead people about their performance..."

I see no misleading here. They were pointing out that this instruments aren't suitable for long term. They're not. They are not arguing short term performance, or daily performace (though those also haven't always been the best either).

MOST people don't trade, they invest. IRAs, 401Ks, PRAs, all of these types of accounts are opening up to ETFs, if they aren't already. These are not suitable investment vehicles, but they're great trading vehicles.

Banning them outright is silly, however banning them from long term investment accounts or retirement accounts is more reasonable.

~X~

Why Leveraged ETFs Are Bound to Deteriorate

Widestrides said:
"But wouldn't ANY volatile stock be subject to the same "decay?" If a biotech stock goes up 10% one day and down 10% the next, it also is not back to even. It has decayed 1%"

Only if you sold it.

A stock doesn't decay. The price of the stock is always the price of the stock. Your return is whatever you sell it at minus whatever you bought it for, regardless of any volatility in the price.

The problem with these ETFs is that they don't hold their positions. Every day they reset. In other words, they are directly exposed to the daily volatility of their underlying assets. That's where the decay happens. The more volatility in day to day price, the worse the decay gets.

Normal index tracking ETFs don't suffer these issues much since most of them don't rebalance that often. But any ETF, or more to the point, any investment strategy that moves in and out of the market "quickly" will end up suffering from decay if they aren't exceptionally careful. And since these ETFs operate "blindly" (no active management) then they will undoubtedly bleed dry over time, especially in markets like we've been having lately.

~X~


On Jul 13 12:40 PM widestrides wrote:

> But wouldn't ANY volatile stock be subject to the same "decay?" If
> a biotech stock goes up 10% one day and down 10% the next, it also
> is not back to even. It has decayed 1%.
>
> So it is the volatility that creates the danger, and true these leveraged
> ETFs are leveraged by design, but they aren't necessarily volatile.
> True, they have been this past year, but this has been a volatile
> year and a "perfect" storm to decay these ETFs. But if they trend
> your way or if you "rebalance" them yourself, you can take the decay
> out of them.
>
> GL