Now I've heard colleagues reasonings; that there is a large decay factor, daily adjustments to NAV... But does anyone know the real reason you don't hold a leveraged ETF for long time horizons?
I mean that's the reason.
ETFs are much more complicated vehicles than people realize. You have to post collateral back and forth on some positions and there is usually one specialist trying to keep exposures constant for pretty heavy inflows and outflows, and this is just extrapolated when the ETF is leveraged. That's just flat out fricking hard to do. Think of it this way, the more you have to buy and sell securities for an ETF the more decay you'll possibly have. The pinnacle example for this is to just look at the VIX and look at the VXX compared to it. That is the definition of decay in the marketplace because you have to constantly roll options and you're being compared to a model index that doesn't have to actually buy and sell options.
A perfect example of how ETFs can be not what they seem, a certain treasury ETF in August of 2011 was 30% collateralized by Italian bonds.
Why couldn't I do this with the "Bear" fund over the next 5-10 years? I feel like I'm missing something. I have attached screenshots of both charts below
You could, but the returns you'll get will not equal the opposite of treasury returns during that time span just as BULL's returns were less than the returns of an actual long bond during that time. I would never own an ETF for over a couple weeks. The decay is just too much.
This post was edited on 2/3 at 12:14 pm