Best ETF’s for 2010…how to choose? (Part 2)
On Monday, we took a look at the ten ETF’s that had the best returns so far in 2009 and what could be drawn from such results. It is probably as important to look at those who did poorly and in this column, we take a look at the 10 ETF’s that have the worst returns so far this year. You would certainly expect to have a few leveraged ETF’s in here. It’s no secret that owning a 2 or 3 times bear ETF on something that keeps going up will turn into a disaster.
Worst ETF’s so far in 2009 as per their return
| Ticker | Name | Price | Return YTD |
|---|---|---|---|
| FAZ | Direxion Financial Bear 3x | 20.25 | -94.33% |
| EDZ | Direxion Emerging markets bear 3x | 5.56 | -91.73% |
| TYP | Direxion Technology Bear 3x | 9.56 | -85.20% |
| SRS | Proshares Ultrashort Real Estate | 7.82 | -84.58% |
| RFN | Rydex Inverse 2x financials | 6.05 | -81.53% |
| TZA | Small cap bear 3x | 10.63 | -77.80% |
| EEV | Proshares Ultrashort Emerging markets | 11.72 | -77.69% |
| SMN | Proshares Ultrashort basic materials | 9.07 | -76.67% |
| SKF | Proshares Ultrashort Financials | 24.93 | -75.80% |
| BOM | Powershare Metals 2x | 17.60 | -75.44% |
And yes, as expected, leveraged ETF’s are a big part of these worst performers. Poor Direxion has the 3 top ETF’s in this category but you would probably expect that when you offer ETF’s with 3X the exposure. What I am surprised about is that for the best performers, a few picks were not leveraged ETF’s but all 10 ETF’s listed here are leveraged. Lessons? Again, I would argue that unless you are truly going for a homerun, I would not use a leveraged ETF for long term investing (the key here being the point that I consider 1 year to be long term).
Here is the chart for the past few months for FAZ:
Of course, with the complete collapse that financials suffered in 2008, it was doubtful that being short financials would be the trade of the year wasn’t it? I would say that generally, picking the same trade that was a winner in the past year will rarely be the result. So do not expect me to pick GLD, BIDU, EBAY or USO for my picks next week.
The other non surprising result is that leveraged ETF’s that were emerging market bears did not do well. An economic recovery is obviously very good news for emerging markets as they have a strong beta (they usually go up and down more than the developed markets).
Seeing these results also helps me confirm that I will not be picking any 3x leveraged ETF’s. I am not 100% decided on 2x ETF’s but I would say that I will probably stay far from those as well.
If you liked this article, you might want to sign up for my FULL RSS FEEDS. Then, you will get my daily posts in your email and can read them at any time. To subscribe CLICK HERE
I agree IS. I think that 3 times leveraged ETFs are hard to trade: you need to be 3 times faster than the market (Prices change so dramatically!) I would also be “triple” careful trading on margin with these kinds of product. They are three times more dangerous than the underlying indexes. No buy-and-hold strategy, that’s for sure.
I agree. Leveraged ETFS are for homeruns only. You should only own these for a short time frame like day-trading. I attempted this in the summer when the volatility dried up thought and lost my shirt.
You could always short the 3X Bear and 3X Bull at the same time to take advantage of the rebalancing and interest costs.
I’m really interested with time decay on leveraged etfs. what are your thoughts about it?
@Lewis – Actually, time decay is how these ETF’s are made. Later this year, there will be ETF’s launched that are leveraged on the montly return instead of the daily returns. But there are good and bad things about it. I’d say the most important is to be aware of how the product works and yes, how the time decay impacts the returns.