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Sorry, I still don’t get it. Can you explain it in simpler terms?

by Tinyyy 11y ago

clock_tower 11y ago
ETFs and the financial-services industry in general are the real world's magic system. I personally don't want anything to do with them... (For one thing, ETFs like to buy and sell whole sectors of the market: if Volkswagen has a problem, they sell Toyota. This strikes me as a good way to lose your money -- while not really understanding what's going on.)
ycombobreaker 11y ago
A Leveraged ETF is designed to amplify (and possibly invert) the daily returns relative to some benchmark. So for example, SPY is the "normal" ETF which tracks the S&P 500 index. UPRO is a triple-leveraged ETF which is designed to get 3x the daily returns (gains or losses) of the S&P 500, using the same amount of capital. Some other ETFs are leveraged and inverse, meaning they will gain value when the index loses value, and vice-versa. In general, day-trading these ETFs is a way for small traders to increase the leverage on their bet. However, there is always some sort of "friction" with using leverage in this way, which causes the all leveraged ETFs to slowly lose value over time. Intuitively, you could say that you taking out a tiny loan in order to increase your bet, and the friction is just interest payments. Maybe somebody else can explain some more technical details, if you are interested (I recommend financial blogs such as Kid Dynamite's on these types of topics). Here are some examples of levered ETFs... sorry, it seems most web UIs are interactive and actively resist linking to a customized chart. I'll link to the benchmark. You'll need to click "Compare" and enter the two leveraged ETFs, be sure to check the "Display as a Percent Change" option, and then mess with the duration (from 1D through 5Y is illustrative). You can see that daily or short-term returns are inverted relative to each other, but long-term returns (6 months or more) are net negative across every pair of ETFs. Crude oil: UWTI is 3x, DWTI is 3x inverse. USO is a proxy for the benchmark. http://www.barchart.com/interactive_charts/etf/USO http://www.barchart.com/interactive_charts/etf/USO Small caps (e.g. Russel 2000): TZA is 3x, TNA is 3x inverse. IWM is a proxy for the benchmark. http://www.barchart.com/interactive_charts/etf/IWM http://www.barchart.com/interactive_charts/etf/IWM Financials: FAS is 3x, FAZ is 3x inverse. XLF is a proxy for the benchmark. http://www.barchart.com/interactive_charts/etf/XLF http://www.barchart.com/interactive_charts/etf/XLF Bottom line: for buy-and-hold investors, leveraged ETFs are always a trap.

Sorry, I still don’t get it. Can you explain it in simpler terms?

by Tinyyy 11y ago

Sorry, I still don’t get it. Can you explain it in simpler terms?

ETFs and the financial-services industry in general are the real world's magic system. I personally don't want anything to do with them... (For one thing, ETFs like to buy and sell whole sectors of the market: if Volkswagen has a problem, they sell Toyota. This strikes me as a good way to lose your money -- while not really understanding what's going on.)

ycombobreaker 11y ago

A Leveraged ETF is designed to amplify (and possibly invert) the daily returns relative to some benchmark. So for example, SPY is the "normal" ETF which tracks the S&P 500 index. UPRO is a triple-leveraged ETF which is designed to get 3x the daily returns (gains or losses) of the S&P 500, using the same amount of capital. Some other ETFs are leveraged and inverse, meaning they will gain value when the index loses value, and vice-versa. In general, day-trading these ETFs is a way for small traders to increase the leverage on their bet. However, there is always some sort of "friction" with using leverage in this way, which causes the all leveraged ETFs to slowly lose value over time. Intuitively, you could say that you taking out a tiny loan in order to increase your bet, and the friction is just interest payments. Maybe somebody else can explain some more technical details, if you are interested (I recommend financial blogs such as Kid Dynamite's on these types of topics). Here are some examples of levered ETFs... sorry, it seems most web UIs are interactive and actively resist linking to a customized chart. I'll link to the benchmark. You'll need to click "Compare" and enter the two leveraged ETFs, be sure to check the "Display as a Percent Change" option, and then mess with the duration (from 1D through 5Y is illustrative). You can see that daily or short-term returns are inverted relative to each other, but long-term returns (6 months or more) are net negative across every pair of ETFs. Crude oil: UWTI is 3x, DWTI is 3x inverse. USO is a proxy for the benchmark. http://www.barchart.com/interactive_charts/etf/USO http://www.barchart.com/interactive_charts/etf/USO Small caps (e.g. Russel 2000): TZA is 3x, TNA is 3x inverse. IWM is a proxy for the benchmark. http://www.barchart.com/interactive_charts/etf/IWM http://www.barchart.com/interactive_charts/etf/IWM Financials: FAS is 3x, FAZ is 3x inverse. XLF is a proxy for the benchmark. http://www.barchart.com/interactive_charts/etf/XLF http://www.barchart.com/interactive_charts/etf/XLF Bottom line: for buy-and-hold investors, leveraged ETFs are always a trap.