The Dangers of x2 and x3 leveraged ETF's

[GordonTheGekko]

I don't understand why, besides the fact that too much leverage is risky if one incurs losses, why leveraged ETF's are viewed as dangerous. Is there something about them that will cause them to randomly explode, without any foresight or liability by the issuer, or a certain price that they disappear, without liquidation?

 

[newwurldmn]

Market time series: +10%, -10%
2x levered fund time series: +20%, -20%

net return after two days:

Market: -1%
Levered fund: -4%

Volatility is massively against you in a 2x levered fund. That's why they are dangerous.

 

[Petsamo]

Leveraged ETFs are safer than individual stocks. A stock can blind-side you and implode without warning.

Leveraged ETFs, as well as non-leveraged, can share the same claim as gold.
They have never been worth zero.

 

[TheGoonior]

Quote from GordonTheGekko:

I don't understand why, besides the fact that too much leverage is risky if one incurs losses, why leveraged ETF's are viewed as dangerous. Is there something about them that will cause them to randomly explode, without any foresight or liability by the issuer, or a certain price that they disappear, without liquidation?

For someone holding the position longer term (i.e: not intraday), compounding is the main issue:

http://seekingalpha.com/article/35789-the-case-against-leveraged-etfs

 

[sledgeyum]

They only work intraday and not long term holds.

3 days is abouy as long as you should.multiday.

Quote from GordonTheGekko:

I don't understand why, besides the fact that too much leverage is risky if one incurs losses, why leveraged ETF's are viewed as dangerous. Is there something about them that will cause them to randomly explode, without any foresight or liability by the issuer, or a certain price that they disappear, without liquidation?

 

[Don Bright]

Even the firms that provide leveraged ETF's advise to only day trade.


Trading of Ultra ETF's: The Ultra ETF's, by design, are basically for Day Trading only.
The UltraPro and UltraPro Short ProShares offered in this Prospectus (each, a “Fund” and together, the “Funds”) seek leveraged or inverse leveraged investment results for a single day only, not for longer periods.


etc.

Don

 

[the1]

This is true only in theory. A leveraged 2x Bear ETF does not consistently deliver a 2% return on a 1% decline of the underlying but your point is well taken.

Quote from newwurldmn:

Market time series: +10%, -10%
2x levered fund time series: +20%, -20%

net return after two days:

Market: -1%
Levered fund: -4%

Volatility is massively against you in a 2x levered fund. That's why they are dangerous.

 

[GordonTheGekko]

Quote from the1:

This is true only in theory. A leveraged 2x Bear ETF does not consistently deliver a 2% return on a 1% decline of the underlying but your point is well taken.

Is there a high volume ETF you can point to on this?

Okay, I checked out some articles and prospectus', the intra day makes sense, as well as the derivative recalculation and futures backwardation (sp?)...

 

[ScalperJoe]

Quote from Don Bright:

Even the firms that provide leveraged ETF's advise to only day trade.


Trading of Ultra ETF's: The Ultra ETF's, by design, are basically for Day Trading only.
The UltraPro and UltraPro Short ProShares offered in this Prospectus (each, a “Fund” and together, the “Funds”) seek leveraged or inverse leveraged investment results for a single day only, not for longer periods.


etc.

Don

When these doubles came out in 2007 they were so new that many traders got caught off guard in not knowing how the volatility premium and rebalancing feature can work against you.

What's great for the issuer is they can keep doing reverse splits, so for example the price on QID is actually much LOWER than where it started, given the reverse split.

 

[76132]

Quote from TheGoonior:

For someone holding the position longer term (i.e: not intraday), compounding is the main issue:

http://seekingalpha.com/article/35789-the-case-against-leveraged-etfs

I'm assuming these funds are designed to track 2x or 3x the daily return?

Is that true for most leveraged ETFs?

Let's say in the first hour of trading S&P 500 goes up by 1%. Is SSO supposed to go up by 2% in the hour? Or it doesn't matter until the end of the day. In other words, is the compounding supposed to be daily, hourly, weekly, or by the second?