Leveraged ETFs: Beware the Performance Conundrum

Includes: DIG, DUG, FAS, FAZ, SDS, SSO
by: TickerSense

When leveraged and inverse ETFs were first released they were touted as wonderful new innovations. Individuals and institutions can double their exposure to a sector or index quickly and easily, the complicated models created by the providers are readily available in a neat little package. As they have developed more and more investors have caught on to the fact that they don't perform as expected.

The fund provider clearly states in the prospectus that the ETFs are designed to match double the daily percentage change, and that as a result total return over a period of time will not be double the index. The real travesty is that the total return for any number of these funds since inception is either negative or grossly different from the index. Below we examined a small selection of 2x and the new 3x funds.
  • Since June 21, 2006 SSO (2x S&P 500) is down 66% while SDS (-2x S&P 500) up on 12%.
  • Since February 1, 2007 DIG (2x S&P 500 Energy) is down 63% while DUG (-2x S&P 500 Energy) is down 56%.
  • Since November 6, 2008 FAS (3x Russell 1000 Financials) is down 84% while FAZ (-3x Russell 1000 Financials) is down 87%!! The inverse ETF has underperformed the long fund in a period where the underlying index is down 18%!

2x S&P 500
2x Energy Sector

3x Financial Sector