Leveraged ETF’s…scam of the century?

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Date posted: 01.05.2009 (4:00 am) | Write a Comment  (8 Comments)

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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!

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8 Comments

  1. avatar

    [...] See original here: Leveraged ETF’s…scam of the century? [...]

  2. Pingback by Four Pillars Investing — January 10, 2009 @ 3:02 am
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    [...] The Intelligent Speculator says that leveraged ETFs are a scam. [...]

  3. avatar

    [...] Intelligent Speculator: What are leveraged ETFs? The intelligent speculator wonders if they’re the scam of the century. [...]

  4. Comment by Dangerman — January 11, 2009 @ 5:26 pm
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    Also, you could just buy a standard ETF on margin…

  5. Comment by Manshu — January 11, 2009 @ 6:01 pm
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    This is very interesting. I never knew such products existed and it seems that are Triple Leverage products also!

  6. Comment by Super Saver — January 11, 2009 @ 7:48 pm
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    I bought three of the 2X inverse ETFs, before I fully understood how they tracked the indices. To ProShares credit, they did acknowledge that 2X won’t necessary track the indices due to the daily reconciliation.

    However, most investors don’t realize this and believe they are getting 2X the long term trend.

    Ah, live and learn. The lesson hasn’t been too expensive yet. And I may still profit on at least one of them.

  7. avatar

    [...] last week’s column about leveraged ETF’s, I talked about the risk involved in using leveraged ETF’s when [...]

  8. Comment by OneDay — March 5, 2009 @ 3:39 pm
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    Would it be a good strategy to hold a double Bull ETF and a double Bear ETF?

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