Finally, leveraged ETFs are preferable to margin, for long term?

[Jym]

Just keep in mind if you take the reverse splits into account the high for Faz the past year is 2,018.50 last November and it's at 20.69 now, and the high for Fas was 293.55 and it's at 84.75 now and the Rifin is actually higher now than it was at that point November of last year.


So it kind of depends on what your definition of long term is. I'd consider a couple weeks to be an eternity

 

[MTE]

Quote from osho67:

Can somebody please explain how these leveraged products work. Or point to some source where these are explained. Much appreciated. Thanks

In simple terms they track the daily percentage changes of the corresponding index. This means that over the long term (more than 1 day) their performance depends on the exact path the index takes. In other words, you can easily end up with a loss after a few days even though the index itself remains unchanged.

Just use the search on ET or google, there are tons of stuff written on precisely this subject as most people didn't and judging by the starter of this thread still don't understand how these work.

 

[mister_doodi]

 

[crgarcia]

Quote from LongArm:

LOL. Okay, then how is it exactly that the financial index, since November 5th, is up 5%, yet FAS is DOWN nearly 70%? Shouldn't FAS be up 15%, hmmm? (I can't wait to hear the answer to this one.)

If FAS went down 70%; in order to recover if needs to go up not 70%, but 333%!

As leveraged ETFs sell assets during downturns, they have too weak a base to recover.

So, it's needed to average-down somewhat with lever'd ETFs.

 

[JJacksET4]

If you wanted a safer way to leverage something like SPY other then Leveraged ETFs OR using margin, you could put 80% into the SPY and 20% into SPY calls (or some other ratio) - yes there is time decay there, but you can buy LEAPS and even if the calls all go to 0, that part will only cost you 20% of the investment in this example.

BTW - Leveraged ETFs "attempt" to return an amount equal to 2x or 3x the daily return or opposite return, but there is at least one case they cannot - if an index fell 40% in a day, the 3X leveraged one would be supposed to fall 120% - I'd like to see that happen!

JJacksET4

 

[crgarcia]

Quote from JJacksET4:

If you wanted a safer way to leverage something like SPY other then Leveraged ETFs OR using margin, you could put 80% into the SPY and 20% into SPY calls (or some other ratio) - yes there is time decay there, but you can buy LEAPS and even if the calls all go to 0, that part will only cost you 20% of the investment in this example.

BTW - Leveraged ETFs "attempt" to return an amount equal to 2x or 3x the daily return or opposite return, but there is at least one case they cannot - if an index fell 40% in a day, the 3X leveraged one would be supposed to fall 120% - I'd like to see that happen!

JJacksET4

Why not zero ETFs (you won't risk blowup even if a cathastrophe happens), some LEAPS, and mostly in T-Bills?

 

[JJacksET4]

Quote from crgarcia:

Why not zero ETFs (you won't risk blowup even if a cathastrophe happens), some LEAPS, and mostly in T-Bills?

crgarcia,

That is another way to do it of course. McMillian goes over that quite a bit in his main book OSI - He mentions the 90/10 idea of 90% of your investments into T-bills and 10% into long options, either calls or puts.

Of course, like he says, if you have several years in a row where the 10% becomes total losses, you could still do quite bad over a 3 or 5 year stretch with a strategy like this.

In his examples, I think he refers more to going with calls/puts on individual stock picks, but of course a person could use options on ETFs as well.

JJacksET4

 

[stevenpaul]

The notion of 3x ETFs being safer than buying on margin or using single stock futures, etc., would seem to suggest that one isn't planning on cutting losses. If you're going to cut a loss when it gets to, say, 2% of your account equity, then it really shouldn't matter which instrument is used. If, however, you think the market is going to "come back" (which, incidentally is how I usually trade, by the way--old habit dies hard), then, yeah, you absolutely have to use the ETFs.

 

[skiff]

Quote from osho67:

Can somebody please explain how these leveraged products work. Or point to some source where these are explained. Much appreciated. Thanks

These ETFs are basically constructed from a single Swap contract (where the dealer is an investment bank such as GS/JPM).

This swap actually guarantee that the ETF entity will enjoy 300%/200% exposure for the next trading day (long or short).

Behind the scene there is a complicated hedging/arbitrage activity done by the investment bank and other players that create a daily re-balancing of the actual components that will reflect the exact exposure of the underline.

This is the main reason you see the insane sharp movement at the last 10 minutes end of the day (along with the short squeeze or people dumping their losing positions)

 

[Hester]

Quote from crgarcia:

It's not exactly equal, but:

if stocks go down 50% (like they did in '07-08-09, or '00-'02), if you are long SPY, you lost 50%.

If you were 1/3 long in a 3x ETF, you lost less than 33.33%.

You start the upside recovery with 70% left in your account, compared to 50%.

No. Your wrong. In theory you are right, but the price decay that a 3X etf would experience in this timeframe would be significant and would alter those numbers. If spy lost 50 percent in one day, then yes what you said would be true, but it takes a long time for the market to fall 50%. Consider this:

Just by purely looking at charts of spy and bgu on yahoo finance, I see that bgu was first brought to market on or around nov. 5, 2008. So lets say you bought bgu and spy on that date, as thats as far back as we can go with 3X etfs. You would of bought bgu for approximately $51 and bought spy for about $96. Again, I'm just going off of yahoo finance's charts so I may not be spot on.

At the very bottom in march spy was at $67.10 and bgu was at $14. So if you owned spy since nov. 5 then you'd be down about 30% and if you were 1/3 long bgu since nov. 5 then you'd be down 24%. So far bgu is better than spy but its not as good as your 70%-50% ratio.

Now fast forward to friday, oct. 2. Say you bought and held both since you bought nov. 5. Spy closed at (as of friday) $102.49. Thats up from the $96 that you bought it at in november, for a total gain of about 7%. Bgu closed at $46.57 (friday). Since you bought it at 51 you would have a total loss of approximitaly 3%.

So if you bought and held midway through this crash and held it through the recent rally, your spy position would currently be up and your 1/3 bgu position would be down. I wish that bgu or any other 3X etf was introduced earlier so that I could look at the charts at the very top to the very bottom instead of starting halfway through the crash. Either way I hope you get the point that you cannot buy and hold these like you can spy or the Q's. The longer you hold it the more you'll get burned.

Also, if you would shorted or bought puts/bearish options spreads on both bgu and bgz on or around the middle of november 2008 when they were introduced then both positions would be in the black. The bgu position would be only a slight gainer, or maybe even a slight loss if you bought puts (because of time decay), but the bgz position would be a home run as it was trading around 100 at that time and is now in the low 20's. Yet another testament to why you should not hold any 3X etf for too long.