Luck-o-the-Irish

Why You Shouldn't Hold Leveraged ETFs Long-Term

I have to agree with Marc here. This topic has been beaten over and over again. To me it feels that this is more a thread to start getting a resume of "being published." I would wager that there are at least 25, nay, 50, articles saying this exact thing. Some do bring new ideas or new strategies. Unfortunately, you are just stating the known. The effort is good, but next time I would recommend doing some research into that which has already been published, and only write an article as such if you have new information or a new twist to add.

Making Leveraged ETFs Work

Jason - gotcha. As I said, the work is good. I simply don't want people to read and automatically apply it. I know we are believe that the masses won't just jump on a concept without thinking it through, but I've seen some bad decisions lately, well, always.

Direxion to Reverse Split 3x Financial ETFs After Steep Fall in Price

fractional shares are paid in cash

Direxion to Reverse Split 3x Financial ETFs After Steep Fall in Price

Trench
-You obviously show no understanding of the mechanics of the funds. They do what they were designed to do. If you don't understand them, then don't use them. But if you are going to make an accussation such as that, then at least back them with some facts. I have outlined MANY of arguments surrounding leveraged ETFs on thestreet.com, and several here. I suggest you add something to the conversation that can be pondered or debated.

Making Leveraged ETFs Work

Good work. The only issue I have is application of the concept. In a strong trending up market, you theoretically need to have an infinite amount of capital in order to be able to keep averaging down. In the most simple sense, you are merely dollar cost averaging based on target points...a work detailed by Gobind Daryanani.

Absurd Inverse and Leveraged ETF Product Whining (Updated)

No sooner said and Direxion announced reverse splits for FAS and FAZ today...


On Jun 29 02:09 PM Luck-o-the-Irish wrote:

> According to one provider, the bar set for reverse splits is around
> $2.50 per share (and a close maintained below that point for several
> days). I believe we saw the first "test" when Direxion just did a
> reverse split on their Daily 3x MidCap Bear fund (seekingalpha.com/symbo...),
> which was no where near zero, and not even that heavily traded in
> comparison to most of their other offerings. That appears to have
> gone smoothly, thus I would suspect we will see more and more reverse
> splits when these enter the single digits.

Absurd Inverse and Leveraged ETF Product Whining (Updated)

Cramer and I have had a running debate for one month on realmoney.com
Obviously, you know my stance, since his is very clear. Would love to see David join the fray!


On Jun 29 04:12 PM corey mendel wrote:

> SageNot, couldn't agree more. How do we set-up a debate?

Absurd Inverse and Leveraged ETF Product Whining (Updated)

I absolutely think that both sides, long and short, will approach zero over time. I agree on the shorting side, but it has to be done carefully since shorting does entail unlimitied loss, and even though they degrade over time, you could face a short term BIG runup before they do head back down. Inventory is tough, and the interest rates can be expensive. I've seen some cost as much as 15% per year to borrow, although they fluctuate a great deal from day to day.


On Jun 29 02:56 PM wundr wrote:

> True. Leveraged funds only trade percentages. Percentages that can
> add up to a quicker change in a short period of time. A quick 50%
> change in the underlying would drop the index in half. A 2x fund
> could, in theory, hit zero.
> Do you think the small negative changes over time will eventually
> be more than the small positive percentage changes?
> Be interesting to see what the NAV of some of theses funds in will
> be in 10-15 years.
>
> That is probably why the best way to trade leveraged funds is take
> the short side.
> If you expect the underlying index to go up short the inverse 2x;
> if shares are available.
> Decay is less and a long term decline may be inevitable anyway.

Absurd Inverse and Leveraged ETF Product Whining (Updated)

wunder,
the basic design of ANY investment is that if it moves down, then it has to move up a GREATER % just to get back to breakeven. The design is what it is, it isn't flawed. The way investors are using them are flawed, misunderstood, or plain careless. People are going to use these regardless of the warnings. Look at alcohol, cigarettes, gambling, soda, sugar...i don't care what it is: People see what they want to see, and will ignore warnings, no matter how many we put out there.


On Jun 29 02:26 PM wundr wrote:

> One of the biggest problems with individual investors is that they
> may buy a leveraged ETF without really understanding what it is.
>
>
> They see 2x or 3x and think, "Hey, I can make a bunch! Two times
> more money by buying SSO than buying SPY, AND its CHEAPER! All I
> have to do is wait for the market to go up and I'll make twice what
> I would make with SPY!"
>
> What they fail to understand, without proper DD, is that it is only
> twice the DAILY return of the change in the underlying index. Unfortunately,
> they hold it for an extended period and it doesn't perform like they
> thought it should have.
>
> I do question a certain design issue associated with them. A close
> look could lead you to believe that they are made to trade to zero
> over time. A downward move can take more of a toll than an upward
> move benefits. Eventually the NAV nearly always declines over time.
> Its in the prospectus of many of them, often hidden in a potential
> gain chart. As long as you're only trading for a current trend (whatever
> time line you choose) you're fine. Has anyone found one that doesn't
> fit this declining NAV scenario?

Absurd Inverse and Leveraged ETF Product Whining (Updated)

According to one provider, the bar set for reverse splits is around $2.50 per share (and a close maintained below that point for several days). I believe we saw the first "test" when Direxion just did a reverse split on their Daily 3x MidCap Bear fund (MWN), which was no where near zero, and not even that heavily traded in comparison to most of their other offerings. That appears to have gone smoothly, thus I would suspect we will see more and more reverse splits when these enter the single digits.

Absurd Inverse and Leveraged ETF Product Whining (Updated)

alajac - You are assuming that the market goes up instead of down first, by saying the 3x inverses will get to zero quickly. All the leveraged ETFs will eventually get close to zero (would only reach zero theoretically if a single day goes moves over 33% for the 3x's or 50% for the 2x's). However, if you read the prospectus, the ETF providers can actually REMOVE all leverage if a market exceeds a certain % up or down in a single day to avoid a move to zero. Mathematically, if the big single day move never happens, they will approach zero, but actually never reach zero. You can keep cutting something in half over and over, and it will never be completely gone.
The problems you speak of in the 1x inverse, would happen with the 1x long, if you started at 100, and the first move was to 80, then back up, etc. This is just basic math, and the application of compounding.
Also, you speak of 25% moves like they happen in a single day. The movement of these leveraged ETFs becomes a function of not WHERE the index gets to, but HOW it gets there.

Absurd Inverse and Leveraged ETF Product Whining (Updated)

David
Great article. I have been arguing this on thestreet.com for the past two months. I've had a lot of back and forth with some of the folks that you mention here, and the counterargument always steers clear of facts. Well written, and I not only support you in your article, but also agree with you completely.
Keep up the good work.

FAS and FAZ: A Short-Seller's Dream?

Mike,
We've been able to borrow. BGU, BGZ, FAS, FAZ, MWJ, MWN, TNA, TZA, ERX, ERY, EDC, EDZ, TMF, and TMV.


On Jun 13 03:56 PM mike78 wrote:

> I've tried to execute a version of this trade, but could not borrow
> any of the 3x levered ETFs apart from ERX (energy equities, which
> hasn't been a great one to short given the steady climb in oil and
> equity prices). Has anything been able to obtain the borrow on any
> other of the 3x ETFs?

FAS and FAZ: A Short-Seller's Dream?

It is NOT an urban myth/legend as we do it all the time. Simply shorting both sides without some type of protective hedge is really pushing the envelope though. The point made about a trend is correct, and one to be careful when trying to execute such a trade. What if you shorting FAS and FAZ back on March 9th in equal amounts? Your short on FAZ would be close to zero, but your short position in FAS would be almost 4 times GREATER than where you initiated it. I don't think many have the capital to withstand such a loss. Also, you have the risk of a call in. What if one side gets called in after a short trend. Logically, you'd have to close both positions or you would open yourself up to an extreme bear or bull position without a hedge. So, if you were forced to close, then you could be forced to close at a big loss not by your choosing.
The theory has merit, but the recommended execution here is not done in a risk managed fashion and the theory is flawed in its simplicity. There are no risks spelled out in this article, and that is truly ashame. It can be done, but needs to be done with additional hedging or you will go broke in a trending market that shows little volatility. Just look at FAS-FAZ from March 9th through yesterday.

Benefit from Ultra ETFs' Tracking Error

SDS is the ultra short S&P 500. The SH is just the inverse.