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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 a

by 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?
mcgoo 7y ago
The leveraged ETFs have a few extra footguns, don't they? Did you see that Direxion suddenly changed the ratios on a bunch of 3x down to 2x on March 31? Scary stuff to me. https://www.marketwatch.com/story/direxion-is-accelerating-the-shifts-of-10-etfs-from-3x-leverage-to-2x-leverage-as-volatility-remains-high-2020-03-27?mod=investing https://www.marketwatch.com/story/direxion-is-accelerating-t... In 2009 a leveraged ETF trading at $100 ended up paying about $85 as a dividend (I think because it was excess profit by being long vol.) That would be an overnight tax hit if you are in the wrong type of account. I don't recall which one it was, maybe FAZ?

by smabie 7y ago

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?

mcgoo 7y ago

The leveraged ETFs have a few extra footguns, don't they? Did you see that Direxion suddenly changed the ratios on a bunch of 3x down to 2x on March 31? Scary stuff to me. https://www.marketwatch.com/story/direxion-is-accelerating-the-shifts-of-10-etfs-from-3x-leverage-to-2x-leverage-as-volatility-remains-high-2020-03-27?mod=investing https://www.marketwatch.com/story/direxion-is-accelerating-t... In 2009 a leveraged ETF trading at $100 ended up paying about $85 as a dividend (I think because it was excess profit by being long vol.) That would be an overnight tax hit if you are in the wrong type of account. I don't recall which one it was, maybe FAZ?