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

Random.Capital · Sep 19, 2009

Quote from LongArm:

Right, if you had bought the FAS/FAZ pair last November, you'd be down only about -83% by now.

How do you get that number?

Going from the spring hi/lo, FAZ has dropped from ~$1000 to ~$20, FAS has increased from $13 to $87. Taking the smallest possible neutral position with the pair would result in...

(87-13)*1000/13 - (1000-20)

for a net change of approximately +$5000.

If you had simply bought $1000 of XLF, you would be at ~(1000/6)*10 or roughly +$1600.

Jym · Sep 19, 2009

Quote from Random.Capital:

How do you get that number?

Going from the spring hi/lo, FAZ has dropped from ~$1000 to ~$20, FAS has increased from $13 to $87. Taking the smallest possible neutral position with the pair would result in...

(87-13)*1000/13 - (1000-20)

for a net change of approximately +$5000.

If you had simply bought $1000 of XLF, you would be at ~(1000/6)*10 or roughly +$1600.

they did a 5 to 1 reverse split just a little while back

they both got to around 7 or 8 bucks if I'm not mistaken

Random.Capital · Sep 19, 2009

Quote from Jym:

they did a 5 to 1 reverse split just a little while back

Splits happened at the same time. I'm using split-adjusted values.

EDIT: Hold on, one was a 10-split, the other a 5-split. So the net gain on the neutral pair is "only" ~ +$2000.

Jym · Sep 19, 2009

well really the main problem with holding the 3x ETFs is that the people who are actually crazy enough to try to hold them for an extended amount of time are the same ones who try to pick tops and bottoms so it works as a net negative.

not saying decay isn't a huge huge drawback it is.

they both started out at around 50 the end of last year and both AT THE SAME TIME were under 10 bucks just a month or so ago before the r/s.

short&naked · Sep 19, 2009

If you need some leverage on the SPY for long term trades, simply use MDY (S&P 400 mid-caps) or the small cap spiders.

They will almost always recover faster than the larger cap funds. And there is no ETF decay risk at all!

My gut feeling is to stay away from those leveraged ETFs.

I know what cgarcia wants: leverage for long term trades without margin risk or option time risk. Unfortunately, for now, this does not exist (yet).

crgarcia · Sep 21, 2009

Quote from short&naked:

In reducing your exposure you are adding a lot of risk.

33.3% of equity in a 3x ETF

IS NOT EQUAL TO:

100% of equity in SPY

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%.

crgarcia · Sep 21, 2009

Quote from short&naked:

I know what cgarcia wants: leverage for long term trades without margin risk or option time risk. Unfortunately, for now, this does not exist (yet).

Yes, that's exactly what I want.

Leveraged ETFs have no time decay.

It's just that since usually markets fall faster than they recover, you will not recover (all your previous losses) during a quick rebound.
During a progressive rebound, they work even better than non-leveraged ETFs.

You just have to average down somewhat with leveraged ETFs.

LongArm · Sep 21, 2009

Quote from Random.Capital:

How do you get that number?

Going from the spring hi/lo, FAZ has dropped from ~$1000 to ~$20, FAS has increased from $13 to $87. Taking the smallest possible neutral position with the pair would result in...

(87-13)*1000/13 - (1000-20)

for a net change of approximately +$5000.

I clearly said if you had bought the pair last NOVEMBER you'd be way down, not if you had bought them last SRING at the hi/lo. Look at the performance chart and see for yourself.

http://stockcharts.com/charts/performance/perf.html?fas, faz

Sure, if you had bought the pair in spring, you'd be way ahead at the moment because leveraged compounding works in your favor when the market is trending, like it has since then. But over time, as prices go up AND down, leveraged compounding works against you and you have price erosion. It's simple math really--and common knowledge by now.

Quote from crgarcia:

Leveraged ETFs have no time decay.

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.)

osho67 · Sep 22, 2009

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

Random.Capital · Sep 22, 2009

Quote from LongArm:

Sure, if you had bought the pair in spring, you'd be way ahead...

Great, sounds like we're in agreement that sometimes it makes sense to buy them, and sometimes it doesn't.