Josh Stern

The Case Against Leveraged ETFs

Re Rydex:
So far SSO is underperforming Rydex Dynamic S&P. It seems like both the redemption factor with mutual funds and the creation factor with ETFs complicate things, making me wonder whether a traditional closed end fund 2X fund wouldn't make more sense.

Re: percentage of NAV in options/futures. Even if it was only 5% at a time, since the cost of borrowing is embedded in the bid/ask spread, we need to know the annual turnover percentage of the derivative position to figure out how it effects the annual cost percentage of the ETF. Consulting Morningstar for the Rydex Dynamic S&P 500, they list the cash percentage for RYTNX as 9.4 %, the annual asset turnover as 19%, and the expense ratio as 1.69%, but it's not clear exactly what those first two stats mean.

The Case Against Leveraged ETFs

Re: Relation to interest rates -
In order to profit from opening an options contract, a trader has to either exercise the option or close the contract. In the former case they need a lot of capital to do that. In the latter case they are paying the bid/ask spread. So current borrowing costs are factored into the bid/ask spread.

Re: Portfolio insurance -
Long term maintenance of synthetic option positions is clearly too complicated and not cost effective for retail investors. But I wonder why brokerages, especially electronic ones, don't offer user-friendly portfolio insurance to their clients based on synthetic option positions. They could charge X$ to open plus Y%/month to maintain. I bet it would be a money maker for them both in terms of direct fees and encouraging higher levels of investment participation from nervous investors and ones with shorter time horizons until they made need the money.

The Case Against Leveraged ETFs

This is a well written article which I enjoyed even though I was already familiar with most of the concepts and material. I'm also a software guy at heart and appreciate an analytical approach to these topics.