Leveraged Short ETFs... something wrong?

WinstonTJ · Jan 10, 2009

Quote from number22:

Quote from another thread; A great presentation.

Number,
it is a good presentation however there are some points that I would take issue with. His explain of compounding with regards to fund exposure and fund leverage is incorrect. ETFs do not have variable increasing leverage per their prospectus and the compounding impacts both the cash/stocks as well as the debt borrowed - its just wrong.

https://admin.na3.acrobat.com/_a763721471/p66106380/

23 minutes through about 30 minutes is where I take issue with.

c.chugani · Jan 15, 2009

Quote from winstontj:

ETFs are simply funds with intra-day liquidity. They price once daily just like most mutual funds and they are benchmarked to a daily index, just like most mutual funds. In that light - yes they will perform just as the others - its not wierd, its just a daily beta which means that the fund seeks to acheive a daily multiplier of the index it tracks.

I wouldn't consider holding any leverage products more than 2 weeks (10 trading days) but that's my own personal opinion.

do these nuances regarding tracking errors,etc. occur with UNLEVERAGED short etfs??

Say for example, instead of buying SDS, I would buy SH. Could the second etf be a buy and hold (ie. an exact opposite mirror image of the SP500)??

Thanks in advance.

c.chugani · Jan 16, 2009

bringing this thread up.

yonisin · Jan 16, 2009

Quote from jjftw:

here's some funny inverse etf math:

when A moves X % a day, the double inverse B moves 2X %, if they both start at 100, and lets say first day A drops 20%, it will be 80 and B will be up 40% or 140

if next day A goes up 25%, it will be back at 100, but B will drop 50% and trade at 70, SO FOR 2 DAY PERIOD A IS UNCHANGED but B, the double inverse etf is DOWN 30%

now lets take another example when A goes up 25% the first day, it will be 125 and B will trade down 50% or 50, and if next day A is down 20% and back at 100, B will be up 40% and trade at 70, again A UNCHANGED for 2 trading days, B DOWN 30%

yonisin · Jan 16, 2009

These are obviously wrought with danger. But they are fun to trade. Where else can you get such intraday volitivity.

Surdo · Jan 16, 2009

Take a look at the range in FAZ today!

Almost an 18 point range today on a $60 stock.

WinstonTJ · Jan 17, 2009

Quote from c.chugani:

do these nuances regarding tracking errors,etc. occur with UNLEVERAGED short etfs??

Say for example, instead of buying SDS, I would buy SH. Could the second etf be a buy and hold (ie. an exact opposite mirror image of the SP500)??

Thanks in advance.

c.chugani,
Sorry to not have replied sooner. You will find that the leveraged products are much more susceptible to compounding and tracking errors because they hold derivatives to employ the leverage. Iâm not licensed or registered so Iâm apprehensive to recommend an investment productâ¦ that said, I think that buying and holding a non-leveraged ETF is just like going out and buying up a basket of stocks or an index. If you want to bet against the S&P short term Iâd use something leveraged as long as you know the risk â if you want to bet against the S&P long term (12 months for example) Iâd use something with either low or no leverage.

Not knowing what type of investor you are and how your portfolio is laid out makes it hard/impossible to give an answer over the internet. Are you trying to use this as an investment strategy or do you consider this a trade?

Bear Plunger · Jan 17, 2009

Quote from c.chugani:

do these nuances regarding tracking errors,etc. occur with UNLEVERAGED short etfs??

Say for example, instead of buying SDS, I would buy SH. Could the second etf be a buy and hold (ie. an exact opposite mirror image of the SP500)??

Thanks in advance.

If I were you I would just short the SPY for now, until you investigate it more. I tried the short ETF once but for a short term trade. Because I'm a position trader - these tracking errors do concern me a bit.

el pollo · Jan 17, 2009

Quote from winstontj

Iâm not licensed or registered so Iâm apprehensive to recommend an investment productâ¦ that said, I think that buying and holding a non-leveraged ETF is just like going out and buying up a basket of stocks or an index. If you want to bet against the S&P short term Iâd use something leveraged as long as you know the risk â if you want to bet against the S&P long term (12 months for example) Iâd use something with either low or no leverage.

Perhaps you should be a tad more low key marketing your firm's ETF's on the internet?

Your advice on 3X leveraged ETF's is certainly appreciated on here, but be careful of your approach.

el pollo