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Leveraged ETFs are not leveraged in the traditional since as one might expect. The article misses this point and the author should rectify and clarify immediate

by anonu 7y ago

Leveraged ETFs are not leveraged in the traditional since as one might expect. The article misses this point and the author should rectify and clarify immediately. Leveraged ETFs promise the daily return. They are reset every single day. So your return over N days is completely path dependent. Even a positive return of the benchmark may result in a negative return in a leveraged ETF if that path was volatile... Leveraged ETFs are trading tools. Do not hold them in your portfolio for more than a few days.

raincom 7y ago
Whoever buys leveraged ETFs should know that "leverage" is not used in the traditional sense. I don't see nothing wrong with the author's usage of leverage.
smabie 7y ago
"These ETFs simply aim to match the relative daily returns of their respective index and occupy the bottom left spot on the aforementioned two dimensional spectrum. A closely related (albeit far less popular) type of product that occupies the bottom middle is the leveraged ETF. A leveraged ETF seeks to obtain a daily exposure on an underlying index scaled by a constant l; which, at this time, is somewhere between -3 and 3 for products currently on the market. If l is less than zero, the ETF provides short exposure to the index and are often called "bear" ETFs; conversely, if l is greater than zero, the ETF provides long exposure to the index, commonly referred to as "bull" ETFs. These securities are usually implemented by means of a rolling futures strategy." "At face value, a retail investor might assume that if the S&P 500 returned 10% in a given year, a 3x leveraged ETF would return 30%. Fortunately or unfortunately depending on your perspective, this is not the case as the ETF seeks to maintain a 3x multiple on the daily return of the S&P 500 instead of the annualized return." The post is about how the conventional wisdom behind these ETFs as "trading tools" is simply not true. All these ETFs do is to increase your beta exposure, in much the same way that buying high beta stocks increase your beta exposure. Practically speaking, there's little difference between a portfolio of stocks with an average beta of 2 and a 2x levered S&P 500 ETF. The risks are the same. Yet, no one goes around calling AMD (which has a beta of 2.83) a single day "trading tool." In fact, holding AMD is way riskier than holding a 3x S&P 500 ETF!
max_likelihood 7y ago
Just curious, what does it mean to say that they are reset everyday?
- nextweek2 7y ago
  You have to return the leverage at the end of the work day. Meaning the shares have to be sold at the end of the day and then brought again the following morning. Meaning you are getting 3x the increase from the start of the work day until the end of the work day but also 3x the potential loss. The problem is that you are exposed to volatility and cannot just ride out a storm. This is a day trading feature and not something for the long term investor. If you have a crystal ball and know that you'll have more up days than down days, then you are good. Otherwise it is akin to speculating rather than investing. They are probably good for a late stage boom cycle (if you could time the bust). (Based on the Leveraged ETF's I have found)

by anonu 7y ago

raincom 7y ago

Whoever buys leveraged ETFs should know that "leverage" is not used in the traditional sense. I don't see nothing wrong with the author's usage of leverage.

smabie 7y ago

"These ETFs simply aim to match the relative daily returns of their respective index and occupy the bottom left spot on the aforementioned two dimensional spectrum. A closely related (albeit far less popular) type of product that occupies the bottom middle is the leveraged ETF. A leveraged ETF seeks to obtain a daily exposure on an underlying index scaled by a constant l; which, at this time, is somewhere between -3 and 3 for products currently on the market. If l is less than zero, the ETF provides short exposure to the index and are often called "bear" ETFs; conversely, if l is greater than zero, the ETF provides long exposure to the index, commonly referred to as "bull" ETFs. These securities are usually implemented by means of a rolling futures strategy." "At face value, a retail investor might assume that if the S&P 500 returned 10% in a given year, a 3x leveraged ETF would return 30%. Fortunately or unfortunately depending on your perspective, this is not the case as the ETF seeks to maintain a 3x multiple on the daily return of the S&P 500 instead of the annualized return." The post is about how the conventional wisdom behind these ETFs as "trading tools" is simply not true. All these ETFs do is to increase your beta exposure, in much the same way that buying high beta stocks increase your beta exposure. Practically speaking, there's little difference between a portfolio of stocks with an average beta of 2 and a 2x levered S&P 500 ETF. The risks are the same. Yet, no one goes around calling AMD (which has a beta of 2.83) a single day "trading tool." In fact, holding AMD is way riskier than holding a 3x S&P 500 ETF!

max_likelihood 7y ago

Just curious, what does it mean to say that they are reset everyday?

nextweek2 7y ago
You have to return the leverage at the end of the work day. Meaning the shares have to be sold at the end of the day and then brought again the following morning. Meaning you are getting 3x the increase from the start of the work day until the end of the work day but also 3x the potential loss. The problem is that you are exposed to volatility and cannot just ride out a storm. This is a day trading feature and not something for the long term investor. If you have a crystal ball and know that you'll have more up days than down days, then you are good. Otherwise it is akin to speculating rather than investing. They are probably good for a late stage boom cycle (if you could time the bust). (Based on the Leveraged ETF's I have found)