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Existing leveraged ETFs are a scam, designed only to fleece "muppets" (as a Goldman Sachs guy once called us). Here's a real life example. You can buy a financ

Existing leveraged ETFs are a scam, designed only to fleece "muppets" (as a Goldman Sachs guy once called us). Here's a real life example. You can buy a financial instrument that purports to hold gold bars on your behalf. Its symbol is GLD. In the past year GLD price has moved from roughly $123 to $153, more or less equal to the price change in 0.1 oz of gold. But that movement isn't enough for some people. They want leverage. So two leveraged instruments were invented. Cleverly named NUGT and DUST. Purported to achieve 2x moves in Bullish and Bearish gold directions, respectively. But let's look at NUGT price from 1 year ago to now. $20.75 -> $7.72. DUST is even worse. $17.33 -> $2.56. A lot of this under-performance is because of the friction involved in leveraged ETFs borrowing and using futures. (This has been explained in great detail by others, I won't attempt it). Summary: GLD (the commodity) 24% gain, NUGT 63% loss, DUST 85% loss. Yes yes, the purveyors of NUGT and DUST will tell you that they're not meant to be held for 1 year. They're for very short term. But they're just trying to mislead you. The fact that both directions lost so much money means that these products do nothing but scam muppets. The SEC should never have allowed ETFs like that.

raincom 7y ago
NUGT, DUST, JNUG, JDST are not based on the gold, but on the gold miners. NUGT/DUST & JNUG/JDST are based on GDX and GDXJ respectively. Usually gold miners (GDX/GDXJ) lag behind gold prices. Many in the market know that gold price is range bound. That's why you can't expect similar moves across GLD and GDX/GDXJ. Leveraged ETFs are bad if the underlying is more volatile. Gold miners are more volatile than biotech(say, IBB), which is more volatile than SPY, QQQ. Go for leveraged bull ETFs on the less volatile underlying, and in the bull market: TQQQ, UPRO, etc. If one wants to capture some short term gains, go for LABU (3x IBB). Leveraged instruments are path dependent. If the underlying ETF is choppy, you are not going to make any money--be it leveraged bull/bearish ETF. An example of choppy/sideway moves in week: 0.5%, -0.45%, +1.2%, -1.3%, 0.25%. In such a market, just stay away from leveraged ETFs.
- PhantomGremlin 7y ago
  If one wants to capture some short term gains, go for LABU (3x IBB). A perfect example of the fleecing of the muppets I'm talking about. IBB one year performance is $114 -> $106. In the same timeframe LABU $65 -> $20. How does the SEC allow that? It's fucking disgusting. The only way to "win" with ETFs like that is to short them, short them, and short them again. Edit: sorry. Didn't emphasize the obvious, real, way to "win" with ETFs like that. You create them and sell them to muppets. Billy Ray figured this out pretty quickly in Trading Places: Mortimer Duke: Tell him the good part. Randolph Duke: The good part, William, is that, no matter whether our clients make money or lose money, Duke & Duke get the commissions. Mortimer Duke: Well? What do you think, Valentine? Billy Ray: Sounds to me like you guys a couple of bookies. Randolph Duke: [chuckling, patting Billy Ray on the back] I told you he'd understand.
  - smabie 7y ago
    I mean, look at UPRO (3x levered bull S&P 500 ETF). From inception (2009) to date it's returned 1000% compared to the S&P 500's 170%. And from inception to Feb it's returned 3300%. I've personally held UPRO from 2014 until late January and have made a truckload of money off of it. I then made a truckload more money buying VIX futures before the VIX spiked to over 80. People say that you shouldn't hold these things long-term, but that's simply not true. All you're doing with leverage is increasing your beta. Obtaining 2x leverage on the S&P 500 is going to look pretty much the same as buying stocks in the S&P 500 with a beta of 2. Yet no one complains about high beta stocks being a scam. You're telling me you would short UPRO? If you shorted UPRO pretty much anytime between 2009 and the beginning of 2020, you would have lost either all of your money, or in the best case, most of your money.
    - PhantomGremlin 7y ago
      Excellent market strategy and timing! I wouldn't short any chart that moves from the lower left -> upper right. The ones I mentioned previously do the opposite. Their chart goes from the upper left -> lower right. Still, timing is so important. If you had gone long UPRO on Feb 18, you would have seen $80 -> $24 in about 6 weeks. Losing 70% of your money would be a little unsettling. You're obviously one of the "big boys". Most people don't dare play in VIX futures, because of the intrinsic high leverage and because of the high volatility. Wouldn't it be less risky to trade VIX options instead? I don't follow either closely, I'm genuinely asking.
smabie 7y ago
Hi, I wrote the post. I'm wondering exactly what your issue is with leveraged ETFs? What, mathematically, makes them unsound? I think my post covers the risks and benefits of them while also proposing a new kind of leveraged ETF that might help mitigate the volatility drag associated with leverage. Edit: I'm not familiar with the leveraged gold ETFs you mention, but I am familiar with UGLD, which tracks the 3x daily return of gold. Comparing UGLD vs GLD: https://www.google.com/search?client=firefox-b-1-d&tbm=fin&sxsrf=ALeKk00j4-E-gQA5dxmzjSRZx_SB9q3wIw:1586139494836&q=NASDAQ:+UGLD&stick=H4sIAAAAAAAAAONgecRoxi3w8sc9YSndSWtOXmNU5-IKzsgvd80rySypFJLkYoOy-KV4ubj10_UNU8oMM5Irs3gWsfL4OQa7OAZaKYS6-7gAAGxIYxJKAAAA&sa=X&ved=2ahUKEwiWo52J3tLoAhVJmnIEHehlCwQQ3ecFMAB6BAgPEBM&biw=1517&bih=891#smids=/g/11bbrnsz0j&wptab=COMPARE https://www.google.com/search?client=firefox-b-1-d&tbm=fin&s... UGLD is up compared to GLD. Moreover, UGLD is correctly tracking the 3x daily move of GLD. Also, the use of futures and leverage aren't really related. Sure, that's how most leveraged ETFs work, but there's no reason why there couldn't be a leveraged ETF that simply borrowed the money. Edit2: both DUST and NUGT are based on the Gold Miners Index, which isn't the same as GLD (which tracks actual gold).
- PhantomGremlin 7y ago
  My issue with leveraged ETFs is, quite simply, the 30,000 foot view of results: They suck. Even though NUGT and DUST are from the same fund company and purport to do the opposite of each other, they both lost substantial amounts of muppet money over the last year!!! You're trying to analyze these things mathematically, I'm just saying "look at the actual results over a years time". I suspect (without checking in detail) that UGLD is doing better is because it's an ETN and not an ETF. Usually an ETN is a debt obligation of a financial counter-party, in this case Credit Suisse. How Credit Suisse manages their debt agreement (the ETN) is up to them. These can be black boxes to the outside world. It's possible that CS is buying or selling physical gold or gold futures to hedge their exposure, but they don't have to be. It's simply a financial contract. Right now CS is a good financial risk. But the same might have been said about Lehman Brothers before the great recession. They were counter-parties to some ETNs and people who owned those were screwed when Lehman went bust: https://www.etf.com/sections/features-and-news/lehman-bros-etn-fallout https://www.etf.com/sections/features-and-news/lehman-bros-e... I agree with you that a leveraged ETF they can simply borrow money to increase leverage. (Not much different from how leveraged hedge funds operate). But for some reason they don't operate that way. So it must be somehow advantageous for them to use futures. Maybe because it's difficult to "short" something like e.g. WTI crude in a standardized way on an exchange? You can be long or short a futures contract for gold or WTI, that's a liquid market. But shorting the physical commodity might be harder?
anonu 7y ago
The SEC should just not call them ETFs.
haltingproblem 7y ago
This. I was going to write a comment but you nailed every point. These are not "leveraged" ETFs in any sense of the word. These are vehicles designed by savvy bank trading desks to drain noobs of their money. One way to think of them is casino bets with very high carry costs. Hold them long enough and you will give back gains and most of your capital to the house. I admire the article writer's effort but he seems to lack a working understanding of leveraged ETFs and how they are constructed.
- smabie 7y ago
  > Hold them long enough and you will give back gains and most of your capital to the house. How, why? Everyone says this (which is why I wrote my post), but no one has actually explained it to me. A leveraged SPY ETF does not have a high carry cost. Sure, if there's an ETF that's buying long-dated contango futures, then yeah, you're going to lose money in most environments (TVIX, etc). But leveraged equity ETFs do not have this property. Moreover, if you really think that most of your money is going to go to the house with any of these products, surely you should just be able to short all of them and make a risk-free profit, right?
  - haltingproblem 7y ago
    I know I have learned a ton from HN comments. They are a goldmine of information and people willing to explain and mostly engage in educational respectful discourse. I don't think anyone here will have a problem explaining the mechanics to you if you politely asked or were open to it. Your tone comes off as extremely aggressive and defensive to boot. Statements like - "what exactly is your problem" does not engender mutually beneficial back and forth. It takes time to craft a correct and well-researched response. It is not incumbent on me to correct your misunderstandings. I might consider volunteering my time if you presented a minimal facade of civility and gratitude. You have shown none of these.

raincom 7y ago

NUGT, DUST, JNUG, JDST are not based on the gold, but on the gold miners. NUGT/DUST & JNUG/JDST are based on GDX and GDXJ respectively. Usually gold miners (GDX/GDXJ) lag behind gold prices. Many in the market know that gold price is range bound. That's why you can't expect similar moves across GLD and GDX/GDXJ. Leveraged ETFs are bad if the underlying is more volatile. Gold miners are more volatile than biotech(say, IBB), which is more volatile than SPY, QQQ. Go for leveraged bull ETFs on the less volatile underlying, and in the bull market: TQQQ, UPRO, etc. If one wants to capture some short term gains, go for LABU (3x IBB). Leveraged instruments are path dependent. If the underlying ETF is choppy, you are not going to make any money--be it leveraged bull/bearish ETF. An example of choppy/sideway moves in week: 0.5%, -0.45%, +1.2%, -1.3%, 0.25%. In such a market, just stay away from leveraged ETFs.

PhantomGremlin 7y ago
If one wants to capture some short term gains, go for LABU (3x IBB). A perfect example of the fleecing of the muppets I'm talking about. IBB one year performance is $114 -> $106. In the same timeframe LABU $65 -> $20. How does the SEC allow that? It's fucking disgusting. The only way to "win" with ETFs like that is to short them, short them, and short them again. Edit: sorry. Didn't emphasize the obvious, real, way to "win" with ETFs like that. You create them and sell them to muppets. Billy Ray figured this out pretty quickly in Trading Places: Mortimer Duke: Tell him the good part. Randolph Duke: The good part, William, is that, no matter whether our clients make money or lose money, Duke & Duke get the commissions. Mortimer Duke: Well? What do you think, Valentine? Billy Ray: Sounds to me like you guys a couple of bookies. Randolph Duke: [chuckling, patting Billy Ray on the back] I told you he'd understand.
- smabie 7y ago
  I mean, look at UPRO (3x levered bull S&P 500 ETF). From inception (2009) to date it's returned 1000% compared to the S&P 500's 170%. And from inception to Feb it's returned 3300%. I've personally held UPRO from 2014 until late January and have made a truckload of money off of it. I then made a truckload more money buying VIX futures before the VIX spiked to over 80. People say that you shouldn't hold these things long-term, but that's simply not true. All you're doing with leverage is increasing your beta. Obtaining 2x leverage on the S&P 500 is going to look pretty much the same as buying stocks in the S&P 500 with a beta of 2. Yet no one complains about high beta stocks being a scam. You're telling me you would short UPRO? If you shorted UPRO pretty much anytime between 2009 and the beginning of 2020, you would have lost either all of your money, or in the best case, most of your money.
  - PhantomGremlin 7y ago
    Excellent market strategy and timing! I wouldn't short any chart that moves from the lower left -> upper right. The ones I mentioned previously do the opposite. Their chart goes from the upper left -> lower right. Still, timing is so important. If you had gone long UPRO on Feb 18, you would have seen $80 -> $24 in about 6 weeks. Losing 70% of your money would be a little unsettling. You're obviously one of the "big boys". Most people don't dare play in VIX futures, because of the intrinsic high leverage and because of the high volatility. Wouldn't it be less risky to trade VIX options instead? I don't follow either closely, I'm genuinely asking.

smabie 7y ago

Hi, I wrote the post. I'm wondering exactly what your issue is with leveraged ETFs? What, mathematically, makes them unsound? I think my post covers the risks and benefits of them while also proposing a new kind of leveraged ETF that might help mitigate the volatility drag associated with leverage. Edit: I'm not familiar with the leveraged gold ETFs you mention, but I am familiar with UGLD, which tracks the 3x daily return of gold. Comparing UGLD vs GLD: https://www.google.com/search?client=firefox-b-1-d&tbm=fin&sxsrf=ALeKk00j4-E-gQA5dxmzjSRZx_SB9q3wIw:1586139494836&q=NASDAQ:+UGLD&stick=H4sIAAAAAAAAAONgecRoxi3w8sc9YSndSWtOXmNU5-IKzsgvd80rySypFJLkYoOy-KV4ubj10_UNU8oMM5Irs3gWsfL4OQa7OAZaKYS6-7gAAGxIYxJKAAAA&sa=X&ved=2ahUKEwiWo52J3tLoAhVJmnIEHehlCwQQ3ecFMAB6BAgPEBM&biw=1517&bih=891#smids=/g/11bbrnsz0j&wptab=COMPARE https://www.google.com/search?client=firefox-b-1-d&tbm=fin&s... UGLD is up compared to GLD. Moreover, UGLD is correctly tracking the 3x daily move of GLD. Also, the use of futures and leverage aren't really related. Sure, that's how most leveraged ETFs work, but there's no reason why there couldn't be a leveraged ETF that simply borrowed the money. Edit2: both DUST and NUGT are based on the Gold Miners Index, which isn't the same as GLD (which tracks actual gold).

PhantomGremlin 7y ago
My issue with leveraged ETFs is, quite simply, the 30,000 foot view of results: They suck. Even though NUGT and DUST are from the same fund company and purport to do the opposite of each other, they both lost substantial amounts of muppet money over the last year!!! You're trying to analyze these things mathematically, I'm just saying "look at the actual results over a years time". I suspect (without checking in detail) that UGLD is doing better is because it's an ETN and not an ETF. Usually an ETN is a debt obligation of a financial counter-party, in this case Credit Suisse. How Credit Suisse manages their debt agreement (the ETN) is up to them. These can be black boxes to the outside world. It's possible that CS is buying or selling physical gold or gold futures to hedge their exposure, but they don't have to be. It's simply a financial contract. Right now CS is a good financial risk. But the same might have been said about Lehman Brothers before the great recession. They were counter-parties to some ETNs and people who owned those were screwed when Lehman went bust: https://www.etf.com/sections/features-and-news/lehman-bros-etn-fallout https://www.etf.com/sections/features-and-news/lehman-bros-e... I agree with you that a leveraged ETF they can simply borrow money to increase leverage. (Not much different from how leveraged hedge funds operate). But for some reason they don't operate that way. So it must be somehow advantageous for them to use futures. Maybe because it's difficult to "short" something like e.g. WTI crude in a standardized way on an exchange? You can be long or short a futures contract for gold or WTI, that's a liquid market. But shorting the physical commodity might be harder?

anonu 7y ago

The SEC should just not call them ETFs.

haltingproblem 7y ago

This. I was going to write a comment but you nailed every point. These are not "leveraged" ETFs in any sense of the word. These are vehicles designed by savvy bank trading desks to drain noobs of their money. One way to think of them is casino bets with very high carry costs. Hold them long enough and you will give back gains and most of your capital to the house. I admire the article writer's effort but he seems to lack a working understanding of leveraged ETFs and how they are constructed.

smabie 7y ago
> Hold them long enough and you will give back gains and most of your capital to the house. How, why? Everyone says this (which is why I wrote my post), but no one has actually explained it to me. A leveraged SPY ETF does not have a high carry cost. Sure, if there's an ETF that's buying long-dated contango futures, then yeah, you're going to lose money in most environments (TVIX, etc). But leveraged equity ETFs do not have this property. Moreover, if you really think that most of your money is going to go to the house with any of these products, surely you should just be able to short all of them and make a risk-free profit, right?
- haltingproblem 7y ago
  I know I have learned a ton from HN comments. They are a goldmine of information and people willing to explain and mostly engage in educational respectful discourse. I don't think anyone here will have a problem explaining the mechanics to you if you politely asked or were open to it. Your tone comes off as extremely aggressive and defensive to boot. Statements like - "what exactly is your problem" does not engender mutually beneficial back and forth. It takes time to craft a correct and well-researched response. It is not incumbent on me to correct your misunderstandings. I might consider volunteering my time if you presented a minimal facade of civility and gratitude. You have shown none of these.