Over the past few months, I’ve seen many investors jumping into a new type of product that has been gaining popularity… leveraged ETF’s. What are they? They are basically structured products that promise to give you double the exposure for a specific product (most often specific indexes or sub-indexes). Seems great doesn’t it? Of course there are more fees associated with these funds because they trade more often and need to borrow funds to get the double exposure. That is fair of course and understood by most investors.
The problem lies in that this product gains double the exposure every day. “Every day”. If you are investing in a product that has a constant daily return, you will basically be getting double the return (less fees) over the long term which is what you are looking for. But very often, returns on indexes are very volatile and you will important ups and downs. 2008 was obviously a great example of that and thus IntelligentSpeculator has decided to look into the returns of some of the leveraged ETF’s for 2008.
Obviously, returns will be over a big range, but you would still expect to have a Bear and a Bull fund give close to 0% of return right? I mean if you are 2 times long and 2 times short, you should be about flat right (less fees). Some of these funds were very far from this. Look at an example such as the Betapro funds.
S&P/TSX Global Gold Bull Plus ETF -59.76%
S&P/TSX Global Gold Bear Plus ETF -73.67%
Wow!! Of course this is an example that is probably an extreme compared to most. But compare this to a YTD return for the single ETF GLD.
Long GLD: -4,9%
Short GLD: 4,9%
Quite a difference isn’t it? Honestly I think most investors have not looked at the impact between owning leveraged ETF’s for long term trading. Are they a scam? No, they’re not in my opinion because of 2 reaons:
-They are usually doing what they are supposed to (give a daily exposure equal to 2 or more times the return)
-They should be used for very short term trading such as daily trading where they do indeed give you a 200% exposure long or short.
So if you are looking into making long term picks, please do some research before going in with these leveraged ETF’s. They are becomming more and more popular and we can now even invest in ETF’s that have 3x the exposure, and are thus even more risky if volatilty lifts off!