The flip side to leveraged ETF’s

By: ispeculatornew
Date posted: 01.12.2009 (4:00 am) | Write a Comment  (6 Comments)

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In last week’s column about leveraged ETF’s, I talked about the risk involved in using leveraged ETF’s when investing, especially when doing long term investments. However, there is no doubt that these products provide active investors with incredible opportunities because of their incredibly volatility. Below are two charts of the biggest movers since the markets lows of November 20th.

And there is no doubt that the right plays have been incredibly profitable. Talk about a return of over 80% for TNA and you will know exactly what we mean. And this important volatility is exactly the reason why these products have been picking up so much popularity in recent months with total assets estimated to be over $500 billions.

Even in terms of hours your investments can see volatility that would have been unthinkable a few years ago. Did you hear about FAS, an ETF that tracks 3 times the return of the US financials? A few months ago it went up over 100% in less than 8 hours of trading. That is what we call volatility isn’t it?

Of course, any experienced trader would tell you that you will not do well trading these extremly volatile products using only feelings. You will usually need a model or certain methodology as well as some very clear exit points. Are you looking for 20%? If so, when it reaches that point, get out. Looking for returns of 50% on every trade will lead you to failure, no doubt about it.

As well, I found it very interesting that after writing my piece on these leveraged ETF’s when I looked at some of the picks by other members of the friendly 2009 stock picks competition a few of them had taken these exact products. Wouldn’t it be ironic for me to lose out to other bloggers who are using the exact product that I say cannot be used long term. Ok, 1 year (the length of the contest) is probably not very long term. But you would still think the theory would apply. What I’ll say is that of course if there are big movements in the market towards their picks, they will achieve good results and better ones than ETF’s like mine (USO and GLD). But I think that if we see a fairly flat year, I will come out on top for comparable picks (USO vs 2 x Oil for example), and if that is true, then I could safely argue that over a lifetime, we will have many more “flat” years than extremly volatile years. Of course, it’s all up for debate and I’ll be the first one to come out if I prove to be wrong on this but I think that over the next few months, a lot more information will come out about how these leveraged ETF’s work, how they are maintained and the risks associated with them.

In the meantime, look the results below and hope you can capture the next 82% up move in 2 months!

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  1. Comment by Kel Murdock — January 15, 2009 @ 1:27 pm

    Great post – thanks for the info.I have been looking at these recently in anticipation of shorting US treasuries through PST. Doing my own back of the envelope on SDS the returns are very volatile and don’t track the 2x factor well over the long term. I wonder though if the long term key is entering when volatility is low.

  2. Comment by admin — January 15, 2009 @ 7:11 pm

    Very interesting strategy yes. Do you expect treasuries to expect over the next few months or is this a medium-long term play?

    But I would tend to say yes, in an environment with less volatility, leveraged ETF’s will be a lot closer to the return we would expect.. I’d still stay away personally though and might maybe use a regular ETF in a margin account if I wanted some leverage…

    By the way, read your blog, very interesting reading, it’s now a bookmark:)

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  4. Comment by OneDay — March 5, 2009 @ 3:34 pm

    Little question: can we lose more than 100% in a Leveraged ETF?

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