Loading ...I have lost more than my share (actually, just my share) of money in ETF’s. I believe the negative effects of leveraged ETF’s have been discussed many times on this forum. If I were smarter, I might have been able to write the information below. But after reading it, I have come to one conclusion: I WILL NEVER BUY ANOTHER LEVERAGED ETF. PERIOD. If you are considering, or on the fence. please take a few minutes to read below. If you still want to buy, you cannot be helped!
“People need to understand that leveraged ETFs are incredibly poor performers — easily illustrated by comparing 3x bull and bear funds targeting the same sector. Here are the 2014 annual results from fact sheets at DirexionInvestments.com:
Gold miners:
NUGT (bull) down 59%
DUST (bear) down 44%
Junior gold miners:
JNUG (bull) down 84%
JDST (bear) down 74%
Day-to-day volatility completely destroys any possibility of positive return. Targeting something more sedate such as the S&P 500, SPXL (bull) managed a 38% gain for 2014, while SPXS (bear) declined 38%.
But those results, although less appalling, are also horrible. Mathematically, a 38% decline requires a 61% gain to offset.
For those interested in buying NUGT (3x GDX) or any other reader who doesn’t understand that leveraged ETF’s attempt to achieve the specified leveraged return synthetically OF EACH DAY instead of the leveraged return OVER TIME, here is a simple example:
Let’s say you have a 1:1 ETF LEVO and a 3:1 ETF LEVT that are both at $100.00 at the start of the trading day #1. LEVO is up 2.0% that day so it closes at $102.00 and LEVT is up 6.0% so it closes at $106.00. Now on trading day #2, LEVO is down enough to bring it back to $100.00, which would make it down 1.961% because it takes a smaller % move to bring it back to $100.00 from $102.00. LEVT would be down 3 x 1.961% (5.882%) which would bring LEVT to $99.76. If that same oscillation was to occur for 60 trading days ( up one day, down the next, 30 times), LEVO would end the 60 day period at $100.00 and LEVT would end the period at $93.18.
This is the slippage that occurs because of leveraged ETFs design to achieve leveraged return synthetically OF EACH DAY and not OVER TIME. The choppier (more days, bigger daily moves, bigger reversals against trend) an unleveraged ETF is to go from point A to B, the more slippage the leveraged ETF will have. Timing the entry of a leveraged ETF investment is critical (i.e., it is hard recover to your entry if the underlying 1:1 ETF just takes a choppy trip to nowhere for 3 months like the example above) as is the discipline to cut and run when underlying 1:1 ETF trends against you. Over time, the return of all leveraged ETF’s is dragged down because it takes a bigger % up to offset any % down.”