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Understanding Triple Leveraged ETFs

xETF has price compounding effect that theoretically favors the bulls rather than the bears.

Make a simple straight line computation of the compounding effect of xETF.

I have an example: Starting price of $10 and 10% rally everyday for 5 days.

Day 1 $10.00
Day 2 1xETF = $11 2xETF = $12
Day 3 1xETF = $12.10 2xETF = $14.40
Day 4 1xETF = $13.31 2xETF = $17.28
Day 5 1xETF = $14.64 2xETF = $20.736

Total Profit 1xETF = $4.64 2xETF = $10.73

2xETF performance over 1xETF = 231%.

Do your own calculation to the downside: My calculation yielded a 2xETF 172% yield over 1xETF. Meaning, profit potential to the downside is not as good as the upside with the 2xETF price compounding effect.

Lets look at the XLF and UYG:

During the last downturn and the most recent upturn using peak to trough and trough to peak resply:

XLF went down from 10.09 early Feb to 5.88 early March for a 41.7% percent profit for shorts in 19 trading days. It went up from 5.88 early March to 9.90 mid March for a 40.6% profit for longs in 10 trading days.

UYG using the same 19 days down and 10 days up yielded a profit for shorts of 63.80% and a profit for longs of 127.7%.

To the downside; UYG performed 152.8% over XLF.

To the upside; UYG made 314.6% over that of XLF. Performing like a 3x in percentage basis.

FAS which is a 3xETF of XLF made 581% price appreciation over XLF during the same 10 days rally in March 2009.

That is how compounding by 2x and 3x works over time.

Compounding works much better for long-term investors rather than for short-term traders since if you buy and sold at the same day, you will never benefit from price compounding.

Do your math.

Leveraged ETFs: Is Tracking Error Really So Troublesome?

xETF has price compounding effect that theoretically favors the bulls rather than the bears.

Make a simple straight line computation of the compounding effect of xETF.

I have an example: Starting price of $10 and 10% rally everyday for 5 days.

Day 1 $10.00
Day 2 1xETF = $11 2xETF = $12
Day 3 1xETF = $12.10 2xETF = $14.40
Day 4 1xETF = $13.31 2xETF = $17.28
Day 5 1xETF = $14.64 2xETF = $20.736

Total Profit 1xETF = $4.64 2xETF = $10.73

2xETF performance over 1xETF = 231%.

Do your own calculation to the downside: My calculation yielded a 2xETF 172% yield over 1xETF. Meaning, profit potential to the downside is not as good as the upside with the 2xETF price compounding effect.

Lets look at the XLF and UYG:

During the last downturn and the most recent upturn using peak to trough and trough to peak resply:

XLF went down from 10.09 early Feb to 5.88 early March for a 41.7% percent profit for shorts in 19 trading days. It went up from 5.88 early March to 9.90 mid March for a 40.6% profit for longs in 10 trading days.

UYG using the same 19 days down and 10 days up yielded a profit for shorts of 63.80% and a profit for longs of 127.7%.

To the downside; UYG performed 152.8% over XLF.

To the upside; UYG made 314.6% over that of XLF. Performing like a 3x in percentage basis.

Boy - that is the effect of price compounding to the upside! Remember, when you deposit $10,000 into the bank and don't withdraw the interest profit everyday, that profit will earn interest the next day - and so on and so forth. $10,000 will double in 16 years with 5% interest compounded yearly. While without compounding, it will require 20 years to double.

FAS which is a 3xETF of XLF made 581% price appreciation over XLF during the same 10 days rally in March 2009.

Do your math.