E Thomas St.

Understanding Triple Leveraged ETFs

One final way to come out ahead is you trade the pair on the thesis of mean reversion where you have purchase the pair at the mean (if you can really determine that for some of these products) and you sell the one that goes up at some point in the future, then wait for the value to return to mean. I don't buy this hypothesis working in reality but it is still a possible way to use them.

Understanding Triple Leveraged ETFs

Some of this performance stuff isn't even as complicated as one has to make it. The performance of two ETFs tracking the same index in opposite directions is not scaled linearly. You can do simple multiplication to figure this out (A large downside move needs an even large upside move to offset it. A 10% drop needs more than 10% upside to get back to the initial value the next day. A 10% gain can be lost by 10% loss the next day. Now do this again and again and again.) It doesn't matter much if there is leverage involved, but it does exacerbate the propensity to lose money. I've also noticed that for a traded pair to stop losing money there needs to be a 3 day trend one way or another. Even so, a 4 day trend of equal gain every day one way can be wiped out by a 2 day trend the other way.

The only ways you ever come out ahead on traded pairs is when one part of the pair goes above 100% (offsetting the possible zero value of the down side wholly. Look at DTO/DXO for this) , when you time the purchase correctly (which is kind of defeating the purpose of the supposed strategy of being market neutral), or when there is a strong trending period (which brings into question why you didn't put all of it on the ETF that was trending).