Kevin Walmsley

FAS/FAZ: Dangerously Crossing the Ultimate Pairs Trade

I use both FAZ and FAS as hedges in our portfolios. Direxion is working on funds that will mimic the trailing 30-day performance of these indices, both up and down, to a 300% magnitude. That will make it considerably easier to use as a hedge.

But I'll make the case that the 8-handle on both FAZ and FAS are irrelevant. Taking a block position in each will result in the same amount of cash on both sides, but you can do that irrespective of relative price: just buy more of the cheaper ETF. So what has the YTD numbers looked like? Awful. FAS year to date is down 78.3%; FAZ down 42%. Just because they are now at price parity--whatever that is for instruments such as these--simply doesn't matter.

2X and 3X ETFs Are Not the Best Long-Term Hedges

You can look at SH and SDS. SH is the inverse S&P 500; SDS is the double-down S&P. Year to date the SH is up 39.21%. Now one might expect the SDS to be up 78%, right? Nope--YTD, SDS is up 61%.
I noticed this last year--I use a lot of inverse ETF's in my portfolio management, and noticed that the levered emerging market was actually underperforming the LONG ETF, even though the long ETF was down over 40% at the time. That's when I wised up and saw them for what they were--very good trading and hedging vehicles for the short-term, but terrible for a long-term holding.


On Mar 08 09:40 PM Douglas wrote:

> Can you give an example of an ETF where this value destruction occurs?
> I've tracked multiple indexes versus both ultra and ultrshorts and
> while yes, they do not track exactly on par with the index, the share
> price value increases over a long holding period? What am I missing?
>
> Thanks