The 3x leveraged ETFs are not for the faint of hea
Post# of 72446
Posted On: 08/23/2015 8:32:45 PM
The 3x leveraged ETFs are not for the faint of heart, or for that matter the buy and hold investors. They get that leverage with options -- the cost of the options and the spreads create what's called "slippage" -- those extra costs mean that your ETF will (over time) not deliver quite the 3x leverage of the underlying index.
Also, there is a "sentiment" component. For example, if people think that a big move down is imminent, they may bid up DXD beyond the 3x exact value so you may overpay to get in. Likewise, sentiment may abandon it and annoyingly you discover that you can't escape the position at what would be the fair value.
However the biggest thing to think about is: Let's say you're wrong and DXD goes down a big percentage. With the leveraged ETFS you now need a bigger percentage move up in DXD, just to break even on your initial investment. (Because your investment is worth less after the move down, you need a higher percentage of the lesser principal to get back to even.)
Over time, ALL leveraged ETF's tend toward zero. Look at NUGT (gold miners bullish 3x fund) for an example -- what kind of move in gold will have to happen for it ever to get back to its IPO price?
http://bigcharts.marketwatch.com/quickchart/q...ttype=Fund
and here's its inverse, DUST -- after all these years, it's not very much above its IPO. What's going to happen to it if gold miners recover?
http://bigcharts.marketwatch.com/quickchart/q...amp;time=8
So -- before you trade them, watch how they move for awhile, and DON'T think you can just buy and hold for long periods of time. They are more traders' vehicles.
Also, there is a "sentiment" component. For example, if people think that a big move down is imminent, they may bid up DXD beyond the 3x exact value so you may overpay to get in. Likewise, sentiment may abandon it and annoyingly you discover that you can't escape the position at what would be the fair value.
However the biggest thing to think about is: Let's say you're wrong and DXD goes down a big percentage. With the leveraged ETFS you now need a bigger percentage move up in DXD, just to break even on your initial investment. (Because your investment is worth less after the move down, you need a higher percentage of the lesser principal to get back to even.)
Over time, ALL leveraged ETF's tend toward zero. Look at NUGT (gold miners bullish 3x fund) for an example -- what kind of move in gold will have to happen for it ever to get back to its IPO price?
http://bigcharts.marketwatch.com/quickchart/q...ttype=Fund
and here's its inverse, DUST -- after all these years, it's not very much above its IPO. What's going to happen to it if gold miners recover?
http://bigcharts.marketwatch.com/quickchart/q...amp;time=8
So -- before you trade them, watch how they move for awhile, and DON'T think you can just buy and hold for long periods of time. They are more traders' vehicles.
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