Oil ETFs: Can you use a leveraged ETF and an inverse ETF to hedge against each other?

Yeah. If you like methodically losing money due to decay.

Never quite understood the decay factor, can you give a brief explanation?

LINK

Flask nails it. The rebalancing costs/fees as the asset moves. One would be better off leveraging up in the actual asset instead of the ETF.

Much appreciated. What exactly do the rebalancing costs and fees consist of?

Let's use a 2 x oil etf for an example. Oil sits at $100/bbl. This particular etf has $10,000,000 in the fund. A 1% move in oil would mean a 2% move in the fund (or $200,000). This means a move in oil to $101 a barrel must mean a $200,000 move in the fund. This would mean if the etf was using NYMEX futures for the fund at the start of the trading day with oil at $100 they must hold 200 futures contracts. The move to $101 now gives 10,200,000 in the fund. The next day a 1% move in oil requires a move in the fund of $204,000. Now the fund would have buy 3 to 4 additional contracts to stay at the proper leverage ratio advertised by the fund.

Now lets say oil dropped 1% with oil at $100. Now the fund has 9,800,000 and must sell contracts (and lock in leveraged losses) to maintain the proper 2:1 leverage.

Thanks for your contribution to this thread. I'll admit I am still trying to fully grasp the concept of decay...however, I bought XIV (a leveraged ETF) back in June 2013 for ~$24. Since then the S&P 500 has returned 25% and XIX 37% (see chart below). I have basically treated it like a stock and held it long term against all conventional wisdom, I guess.

Could you tell me how the decay applies when you hold a leveraged ETF for long periods of time and where I might be losing out?