This post is yet another demonstration of why holding leveraged ETFs for a longer period is not worthwhile. It is also a brief examination of how the less risk averse among us might take advantage of this fact.
I wrote a while back about the dangers of holding leveraged ETFs over the longer term. As everyone should know, these instruments are designed to be used for short term trades. You can see this by looking at any of the leveraged bear ETFs' highs and lows. Even while the market is making new 52 week lows, many bear ETFs are off their highs, some by as much as 50% or more. This is because the longer one holds them, the more likely it is that volatility will kill performance. Morningstar recently summed this up in a two part video series.
So if holding the leveraged ETFs for a long time may not be very profitable, what about selling them? Here is a pretty risky arbitrage strategy that should work as long as the market stays volatile. This one is best left for the gamblers among us.
Sell short the leveraged ETFs in pairs. That is, sell short both the bull and bear ETFs for the same underlying index for the same dollar amount. For example, short $10,000 worth of BGZ and short $10,000 worth of BGU. This position is partially hedged. Since the ETFs essentially mirror one another's movements, as long as the market does not take one direction for too long, the position should be relatively stable. For example, suppose BGU goes up 10%. BGZ should fall 10%. You've neither gained nor lost anything. Any underperformance of the ETFs relative to the underlying index is the short seller's profit.
Take a look at the following most liquid 3x ETF
