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LSUcam 
LSU Fan
Destin FL
Member since Dec 2011
381 posts
| Leveraged ETFs - holding periods (Posted on 1/31/13 at 6:36 pm)
I am looking at these x2 & x3 market movement ETFs if nothing else than for some product familiarity. I've done light research regarding holding these ETFs for mid-to-long term holding periods, but from what I can find this is a big no-no because of the way the ETFs perform by nature.
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've got to be missing something. My theory is that I would buy the 20-yr Treasury Bear x3 and hold for 5 or so years, as rate should and will gradually creep upwards, thereby reducing existing bond values.
Now I try to look at this logically by looking at the opposite ETF, 20-yr Treasury Bull x3 and saying if I had bought the "Bull" in 2010, and had a cost basis of 30, then I could have sold it today for roughly a 100% gain disregarding commissions.
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.
BULL
BEAR
Thanks in advance!
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LSUcam
LSU Fan
Destin FL
Member since Dec 2011
381 posts
| re: Leveraged ETFs - holding periods (Posted on 2/1/13 at 10:23 am to LSUcam)
Self bump. Any CFAs in the house?
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jso0003 
Auburn Fan
Birmingham/Atlanta
Member since Jun 2009
4456 posts
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| re: Leveraged ETFs - holding periods (Posted on 2/1/13 at 11:10 am to LSUcam)
Ill bump as well as I'd love to hear a detailed analysis 
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CHSBears 
Texas A&M Fan
Baton Rouge
Member since Aug 2007
334 posts
| re: Leveraged ETFs - holding periods (Posted on 2/1/13 at 11:22 am to LSUcam)
Here is a link with some individuals take on leveraged ETF's.
LINK
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sneakytiger
LSU Fan
Member since Oct 2007
746 posts
| re: Leveraged ETFs - holding periods (Posted on 2/1/13 at 12:03 pm to LSUcam)
I think you already posted the main concept - volatility will eat into your return over the long run.
LINK
quote:
Lets say that an index goes up 10% one day and down 10% the next. Over the two day period, the index is would have lost 1%. Although the average return is zero, the compound return is less than that due to volatility. A 3x leveraged product would have lost 9%.
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LSUcam
LSU Fan
Destin FL
Member since Dec 2011
381 posts
| re: Leveraged ETFs - holding periods (Posted on 2/1/13 at 1:17 pm to CHSBears)
quote:
CHSBears
I have read this before, on the decay. But numbers don't lie and if you look at the Treasury Bull chart, if you held the ETF for two years from 2010, you would have a very nice gain.
I don't understand how you wouldn't have.
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BennyAndTheInkJets 
Arkansas Fan
NYC
Member since Nov 2010
2805 posts
| re: Leveraged ETFs - holding periods (Posted on 2/3/13 at 12:10 pm to LSUcam)
quote:
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. 
quote:
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
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