widestrides

The Case Against Leveraged ETFs

Soon, there will be MONTHLY leveraged ETFs and they will be designed to track the indexes x2 or x3 but on a monthly basis. This will help ease the concern about the compounding and volatility issues.

The Case Against Leveraged ETFs

To those who think these are a good long term investment for your IRAs, etc., I would say that if it trends your way consistently, you will do well, but if there is choppiness and volatility along the way, you would actually do better in the 1x ETF! It's just a matter of math and compounding.

FAZ and FAS are the perfect example or the perfect storm AGAINST 3x ETFs. First FAZ skyrocketed as the financials plummeted. But then it plummeted as the financials recovered. The result of that huge up and down wrecked both FAS and FAZ.

If the market goes up and down, BOTH leveraged ETFs will lose.

The Case Against Leveraged ETFs

Shorting both sides works if you expect up and down market for your time frame. But if the market trends one way, you will lose more on the uptrending one than you will gain on the downtrending one. If you've got deep pockets and can hold on until the uptrending gone comes back down, you will do well.

Why Leveraged ETFs Are Bound to Deteriorate

But wouldn't ANY volatile stock be subject to the same "decay?" If a biotech stock goes up 10% one day and down 10% the next, it also is not back to even. It has decayed 1%.

So it is the volatility that creates the danger, and true these leveraged ETFs are leveraged by design, but they aren't necessarily volatile. True, they have been this past year, but this has been a volatile year and a "perfect" storm to decay these ETFs. But if they trend your way or if you "rebalance" them yourself, you can take the decay out of them.

GL