DrBenway

Why Leveraged ETFs Are Bound to Deteriorate

I think a lot of of the posters here completely miss the point. These ETFs are simply path dependent because of the simple compounding.

They will outperform the benchmark in the steady uptrend and downtrend (double-bull in the steady bull-market and double-bear in the steady bear market) and will underperform ("decay") in the sideways, mean-reverting market.

For some of you who want to naively short both long and short ETF, thinking it is free money, just think what will happen to you position in a steady bull or bear market:

Let's take an extreme example to demontrate the point: \

you shorted double-leveraged ETF bull and bear of S&P500 by selling $100 worth of each ETF (just for simplicity sake):

S&P 500 goes up 1% every day for 100 days =>

S&P short bull loss = -$100*(1+0.01*2)^100 = -$724.5
S&P short bear gain => close to 0, so let's assume $100 maximum possible gain (it will be something like $5 in real terms).

You end up -$624 at the end. Get the point?