Alok Swain

Double and Triple ETFs Decay Their Value Faster, By Design

Pantheistic,

I sort of understand you concept about trending forces and volatility or noise as you call it. These are the two forces that influenc the long term behaviour of these leveraged ETFs.

I was wondering if you can share how did you model it, like in Excel, can you share the model or any other info that would help me/us do similar simulation.

Thanks for your insight.

Regards,

Alok


On Feb 25 04:26 AM pantheistic multiple-ego solipsist wrote:

> found this via google, did some quick testing by modeling double
> ETFs with an excel file, and playing around with it.
>
> I modeled a doubled and inverse double ETF by having the double ETF
> always have 2x the percentage change of the underlying between two
> discrete times, and the inverse double -2x the percentage change.
> Also, I put in a paired long column to make looking at the results
> of paired shorting or paired long strategy.
>
> Here are some observations:
>
> With the same starting and ending prices and varying intermediate
> prices, both the double and inverse double ETFs have the same (but
> lower) value.
>
> Increasing the volatility decreases the ETF values.
>
> Essentially, a double ETF is short random noise, but long a directional
> movement. Shorting ETFs in pairs is basically betting that the current
> price reflects some underlying fundamental which will cause the price
> to revert to that mean. If you want to interpret it graphically,
> think of a graph of a running average with noise bands superimposed
> on it. Paired ETF trading is betting on the slope of the running
> average relative to the size of the noise bands. Paired long is on
> the high slope side, paired short is on the high noise side.