Luck-o-the-Irish

Understanding Levered ETFs and Geometric Returns

The firms have the ability to "cash out" the leveraged ETFs or remove the leverage when an index declines by a large percentage in a single day, thus preventing them from going to zero.


On Jan 05 07:27 PM igggy wrote:

> I would like to know what happens with a 3x ETF when the underlying
> index goes 33.3% against it. Does the ETF just go to zero and die?
> Obviously, the same question applied to 2x ETFs if the index goes
> 50% the other way. I know it's a far fetched scenario but I wonder.

Understanding Levered ETFs and Geometric Returns

Squark62 - maybe we should chat. Shoot me an email with some contact info at tcolllins@claruspartne...


On Jan 04 10:43 PM squark62 wrote:

> like Luck-of-the-Irish, i too have benefited from quantitatively
> pairing short and long etfs to form a delta neutral hedge and profit
> during sudden down-turns in the market. does hamiltonian ring a bell?

Understanding Levered ETFs and Geometric Returns

There is a way to profit from this compounding and "inefficiency." We've been doing it for over the last year.

claruspartners.com

The Case Against Leveraged ETFs

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.