Jul

14

LeverThe levered ETFs tend to underperform. Take SSO, which is double the S&P 500 compared to SPY. SSO was listed in 2006. On 7/7/2008 the SPY was back to even while SSO was down 12% since inception. YTD the SPY is down 0.15% (as of yesterday's close) while the SSO is down 4.83%. Levered ETFs are re-weighted each day to match the double daily performance of the S&P. A simple example: if the market stands at 100 and increases to 110 and falls back to 100, the double ETF will be worth 98. So levered ETFs will tend to underperform in sideways markets and naturally (for long ETFs) in declining markets. Also there must be some transaction costs and vig to be paid with the daily re-balancing, especially in volatile markets.

Yishen Kuik replies:

I've thought that owning a double up ETF and a double down ETF at the same time is really like owning a straddle. While the index drifts sideways, you keep losing value, somewhat analogous to theta, but when it takes off in one direction, you start to really get in the money.

Alex Forshaw adds:

The ultra ETFs just hedge themselves with options; a 2x long ETF buys you a basket of calls with some management overhead. A 2x short ETF buys you a basket of puts. So if you are short the ultra long and the ultra short, you are short a bunch of calls and a bunch of puts. So you're short the VIX. And you get hit if vol and vol-squared both go up at the same time.


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2 Comments so far

  1. Jeff DiStanlo on July 15, 2009 9:02 am

    My take on levered ETFs — I have been shorting both the long and short pairs and making steady, low volatility money for some time now.

  2. Ken Drees on July 15, 2009 11:52 am

    These etfs that can get you 1,2,3 times short or long indexes or sectors are designed to be used as short term vehicles, since they do have a slippage/fee rate scheme that is agressive.

    However, I remember reading that one (maybe more than one) of these funds actually didn’t perform very well at all under highly volatile conditions, it couldn’t rebalance or reset itself to its parameters due to the market being halted/closed, and then reopened the next day at vastly different levels. Talk about a frustration factor.

    I now notice that program trading/large entity trading is at some record new high regarding all merket participants. And that most etf trading belongs to these large entities.

    As far as some etfs that claim to be hold physical commodities, here is a link that shows one hedge fund that isn’t taking any chances. http://www.bloomberg.com/apps/news?pid=20601213&sid=a16aPkJLxw0w

    One must wonder if these etfs can be likened to overpriced used sports cars — with occasionaly faulty brakes, and possibly non oem rebuilt motors frshly painted.

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