The Rise of Tripled Leveraged ETF's

[Cutten]

I guess the key question is why use these ETFs, with their management fee and imperfect tracking, when you can just use index futures?

 

[WinstonTJ]

Quote from Cutten:

I guess the key question is why use these ETFs, with their management fee and imperfect tracking, when you can just use index futures?

I would assume that it all comes down to capital. I would assume (without truly knowing) that the average person here does not have the capital to start getting into the futures game. Just a guess.

 

[Cdntrader]

Quote from winstontj:

I would assume that it all comes down to capital. I would assume (without truly knowing) that the average person here does not have the capital to start getting into the futures game. Just a guess.

you can't play sectors intraday with futures.

 

[WinstonTJ]

Going back and reading that first post is funny - the author of that article really had no clue about Direxion or their products.

It has been an interesting 6 months in the office since 11/4/08

 

[Banff01]

Quote from Cutten:

I guess the key question is why use these ETFs, with their management fee and imperfect tracking, when you can just use index futures?

Significantly lower commissions and narrower spreades than the index futures for the most liquid ETFs like FAZ, FAS, SKF, SSO etc. The main advantage for futures is that they accomodate much bigger size for high frequency trading strategies.

 

[Banff01]

Quote from Banff01:

The main advantage for futures is that they accomodate much bigger size for high frequency trading strategies.

And of course taxes!

 

[marketsurfer]

http://etfdb.com/2009/leveraged-etf-report-card/

3x Bulls and Bears
Next up is Direxion’s Large Cap Bull 3x Shares (BGU) and Large Cap Bear 3x Shares (BGZ). As their names indicate, BGU and BGZ attempt to provide daily performance equal to 300% and -300% of the return on the Russell 1000 Index. Since these funds are 3x leveraged (as compared to 2x for the ProShares funds discussed above), we would expect that the range of returns would expand slightly, since increased leverage adds additional uncertainty and potential for tracking error.

So far in 2009 (110 trading days), the daily return on BGU was between 250% and 350% of the daily return on IWB (which tracks the Russell 1000) 73% of the time, and was between 200% and 400% of IWB’s daily return 85% of the time. BGZ returned -250% to -350% of IWB’s performance 77% of the time; the percentage increases to 86% of the time if the interval is expanded to -200% to -400%.



BGZ’s daily returns equaled 250% to 350% of the inverse of IWB’s daily returns 77% of the time. BGU’s daily returns equaled 250% to 350% of IWB’s daily returns 73% of the time.

2 + 2 = ???
To illustrate my earlier point that leveraged ETF returns can become distorted if held for more than one day, consider the year-to-date returns on the funds mentioned in this article. With IWB up 6.6% year-to-date, one might expect BGU to be up about 20% and BGU to be down about 20%. In reality, BGU is essentially flat (up 0.5%), while BGZ is down a whopping 42%!

It’s the same story for the ProShares 2x leveraged funds. IWM is up 7% on the year, but its 2x fund is up less than half that amount (3.3%) and its 2x inverse fund is down 36%. But again, leveraged ETFs aren’t supposed to provide amplified returns beyond a single day, so these figures are more indicative of the risks of leveraged ETFs than the performance of the ProShares or Direxion funds.

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[Scataphagos]

Logically, leveraged ETFs have additional costs for the leverage itself... likely other costs/factors which degrade levered performance over time.

Levered ETFs are best utilized for (1) day trades/hedging, and (2) no longer time frame than "current swing".

 

[marketsurfer]

http://www.tradingmarkets.com/.site.../The-Rise-of-Tripled-Leverage--ETFs-79456.cfm

Why would a trader use these types of products? As you can

Portable Alpha - This hedge fund sounding strategy is simply adding diversification while maintaining the same exposure. Leverage is utilized to free up capital with the proceeds invested in non correlated investments

 

[user X]

Quote from Scataphagos:

Levered ETFs are best utilized for...no longer time frame than "current swing".

I agree that this is the key. Every interday retracement robs the position.

An example for a 2x fund in a long position:

Day 1 - a $10 buy corelates to 100% of the underlying value.
Day 2 - a 10% retracement of the underlying reduces the corelation (and the position) to 80%.
Day 3 - the underlying advances back to it's value at day 1, and the corelation (position) is now 96%. That's a 4% loss with no net movement in the underlying.

To those discussing the 3x versus 2.5x actual performance, I recommend setting up a simple monitoring procedure. I use it to compare everything (sectors, companies within sectors, etc) and it will provide some perspective on actual performance. Find the most recent pivot point for the underlying and the leveraged fund and use this Excel formula:

(ABS((last-pivot last)/pivot last)*100)/(TODAY()-pivot date))*100)

This yields a number that can be used to compare the magnitude of change over time. I've had some great trades with TNA and it's number is 136 compared to the underlying (RUT) which is 31 using the 3/9/09 pivot. The actual magnitudes are 59% for the RUT and 263% for TNA. That's well over 3x and would even include a loss due to retracements since that pivot.

This example is obviously historically unique. I think anyone that would have ridden that entire trend non-stop would be a lucky fool. The sensible trader would have stopped out dozens of times. Thus the problem with calculating stops for these trades, which is something that I'm working on and would like to read what others are doing. I'm currently looking at the Williams and experimenting with modified versions of it to calculate stops.