Leveraged ETFs can be Dog Shit. This is true because people don’t understand what leveraged ETF’s are. Leveraged ETFs are short term trading vehicles plain and simple. No layman investor should own Leveraged ETFs expecting to hold onto them for extended periods and have 3x performance. They are not designed that way, and over time the leveraged products price decays compared to the index. Here are some details explained by Jared Levy from ETFDailyNews: "The Mechanics of Leveraged ETFs Leveraged ETFs were specifically created for professionals and short-term traders and most have nuances you must understand before investing even $1 into them. Here is an example, using the Direxion Daily Financial Bull 3X Shares (NYSE:FAS), which is a very popular leveraged ETF. The FAS is purported to return 3X (300%) the movement of the financial sector index on a daily basis, which it can do so, but not all the time and not if held for a duration longer than a day (yes, a day). Here are some nuances of the FAS:
The Devil Is in Daily Rebalancing Most leveraged ETFs get their leverage only for the day and then at the end of the day, that leverage resets, which can hurt you in the long term. This is the biggest profit siphon when investing in a leveraged ETF. *Check out what happens if the Russell 1000 index moves up 3% today and drops 3% tomorrow and you are long the FAS. If you bought FAS today at $30, it would move up about $2.70 (9%). At the end of today, the ETF would actually take those profits and invest them the next day starting fresh (this is rebalancing). So tomorrow, you now have $32.70 invested at three times leverage, so if the Russell index then drops 3%, the FAS would drop 9% (of $32.70) and you would now lose $2.95, leaving you with a net loss of $0.25, even though the underlying index is actually flat." Or we can show you visually. Below are charts for the Russell Small Cap ETF (IWM) and its 3x version (TNA). Notice how from 12/31/2014 to 12/1/2015 IWM is up fractionally (not including dividend) while TNA is down 5% without a dividend. In short, leveraged ETFs should only be traded by those who know what they are getting into and do not expect to hold for an extended period.
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AuthorBrad Price, the founder of ETF Junkie, has more than 15 years experience trading the markets. Archives
May 2017
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