FAS for Long Term IRA Acct
- Thread starter lpchad
- Start date
Chad,
Leveraged ETFs have a potential costly problem of decay, because the value of the leveraged ETFs are based on the MOVEMENT of the underlying indices, and not based on the VALUE of the underlying indices.
Example:
Underlying index is trading at $100, a 3x bull ETF is current trading also at $100
Day 1:
The underlying index goes up 10%, finishing the day at $110
The 3x ETF goes up 30%, finishing the day at $130
Day 2:
The underlying index goes down 10%, finishing the day at $99
The 3x ETF goes down by 30%, finishing the day at $91
That is a decay of $8 more for the leveraged ETF compared to the index
All leveraged ETFs naturally decay, and at two different time periods, while the underlying index may be trading at the same value, leveraged ETFs will trade at different values, with the lower value at the later period. This is true for both bull and bear leveraged ETFs.
Due to decay, traditional investment strategies such as buy and hold, and averaging down, do not work to the same extent as they work on common stocks and unleveraged ETFs. Holding a leveraged ETF while its value is decreasing, to recover the value of the leveraged ETF, the underlying index has to be much higher than when it was dropping.
Consider buying the financials themselves or a non-leveraged ETF.
Shoot, if you really think the financials are bottoming, sell some puts to acquire the shares. XLF is around $7 and there are plenty of dollar strikes below. Sell the puts and let yourself get assigned.
xlf is not leveraged. it does not have that problem.
FAS is very tempting, but as folks have pointed out here, you have to understand the product and what it is trying to accomplish.
Now having said that and playing around with some math, there is a huge difference in terms of compounding/erosion that takes place with a leveraged fund trading at $100 vs. $4. Just look at FAZ today dropping like $40 intraday.
I am very curious to monitor and see how this plays out -- meaning if we look back in hind sight and this area turns out to be bottom, how will FAS do 12 months or 24 months? You would think price per share would be higher.
After doing some DD, I think XLF is a great way and the best option to take on this sector for long term prospects. I did not realize, but the same folks who gave us SPY & DIA also do XLF. And there is long term history with this fund. I think XLF is a no brainer here. Just get some shares and forget about them. That is what I am going to do as soon as I can untangle my FAS web that I have now woven for myself. Good times.
do not buy FAS for long-tern haul as many folks here point out, the leveraged etf decay with time being on.
it is very attractive, but just for day trading or several day's swing trade, if you use it well, you get rich instantly, if you did not use it well, you become street bums just one day or two.
i would suggest you buy xlf or those heavily beaten down stocks, if they recover, that will be great great return, maybe half year or one year or next year this time, you will smile since you are a slow rich guy
it is very attractive, but just for day trading or several day's swing trade, if you use it well, you get rich instantly, if you did not use it well, you become street bums just one day or two.
i would suggest you buy xlf or those heavily beaten down stocks, if they recover, that will be great great return, maybe half year or one year or next year this time, you will smile since you are a slow rich guy
I want to buy XLF, but am worried about what the profits for financial companies are going to be without all the crazy leverage they got to use in the past. How are they going to replace those earnings? I'm looking at the chart of XLF and am hoping it doesn't end up looking like the Nikkei chart