What is the time decay rate of 2X, 3X ETF ?

J

jimshaw

Hi, All:

What is the time decay rate of 2X, 3X ETF ?

For example, if I hold one 2X ETF, and this ETF's price does not change at all in 3 month, at the end of 3 month, what percentage of my holding will be lost ?

Thanks.
 
It is probably dynamic as I believe they buy put options, which do not decay at a constant rate.

They decay faster as expiration nears.
 
There is no time decay unless you purchase options on the ETFs. The reason the moves don't square is because of volatilty - the leveraged ETFs are designed to mimick daily % swings in their underlyings and that is all. They "square up" internally at the end of the day. There is no inherent time decay with the securities themselves - its the volatility that wreaks havok on their prices relative to underlyings for anyone holding them in large vol environments.
 
Quote from jimshaw:

Hi, All:

What is the time decay rate of 2X, 3X ETF ?

For example, if I hold one 2X ETF, and this ETF's price does not change at all in 3 month, at the end of 3 month, what percentage of my holding will be lost ?

Thanks.
More...

There is no time decay in ETFs like you have in options but there is a management fee because they are a just like a fund that needs rebalancing especially when the underline is a future. I suspect, without being sure or having any hard data, that you may lose about 1% to 2% in that time period.

Good question though. I will look more into it.
 
Quote from riskymove:

There is no time decay unless you purchase options on the ETFs. The reason the moves don't square is because of volatilty - the leveraged ETFs are designed to mimick daily % swings in their underlyings and that is all. They "square up" internally at the end of the day. There is no inherent time decay with the securities themselves - its the volatility that wreaks havok on their prices relative to underlyings for anyone holding them in large vol environments.
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"Leverage Decay"
 
Decay in leverage (on a share by share basis) is severe in these instruments for sure if you are on the wrong side of them but the original post was asking about time decay to which there is none for the leveraged ETFs themselves.
 
Quote from jimshaw:

Hi, All:

What is the time decay rate of 2X, 3X ETF ?

For example, if I hold one 2X ETF, and this ETF's price does not change at all in 3 month, at the end of 3 month, what percentage of my holding will be lost ?

Thanks.
More...
There's no time decay.

Even if the indices stay still, you get dividends.
 
I think one place to look for an analogy is variance swaps and how those contracts vary as a function of time. The CBOE (or CFE maybe) has some listed maybe you could overlay two on the same chart.
 
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