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The 2%/88% example is detailed at
http://bespokeinvest.typepad.com/bespoke/2009/07/leveraged-etf-ban-spreading-like-the-flu.html
An extreme case, no doubt, but it illustrates the point. Even the leveraged ETF providers admit that they are not suitable for buy and holders.
this negative attitude doesn't have a leg to stand on when we look at indexes versus well run ultra ETF's
Not true. Most investors wrongly assume that if an index rises, say, 20% in a period of time, a leveraged ETF will rise by 40%. Of course, this is not the case, as your stats confirm (yes, you may benefit by more than double).
well back to the original post I stated "buy and forget"; what I meant by that was you can buy it now and forget about it until you hear the stock markets are getting toppy and there is nasty economic news about (Sub Prime, Lehman Brothers Failing, increased foreclosures, whatever the next crisis is going to be - or read a book on technical analysis and learn to recognise toppy markets), then you flog it, as you should if you own a standard index ETF.
That's not buy and forget. That's trading/active investing or whatever one would like to call it, but it's not buy and forget.
the only long term view for the markets is up. So if the general trend is up, then a leveraged ETF will only magnify your gains
Depends on what you mean by long, in that markets have suffered many 10-20 year periods of stagnation/decline. Without getting into that debate, however, the fact is that leveraged ETFs were designed with traders, not buy and holders, in mind.
Each to their own, but if there are gains to be made and a financial instrument will offer me more, then I'll do for it.
Sure, they're fine for trading (I trade them myself), but that's all.
If we are painting a picture then lets not scaremonger by posting extreme examples as mentioned above (2%, 88%).
I wasn't scaremongering, I mentioned that it was an "extreme case".
for those that may argue about the state of the market since March, yes, the general trend has been up, but rocky, far from smooth and a good example as to how effective these instruments are.
I wouldn't say it was rocky, US indices have not even suffered a 10% correction during that time (no mean feat, given a run-up of 50%+).
Also, whip-sawed? Whip sawing is only applicable if you have long and short positions. The above ETF's dont hold short positions, you merely lose more on the downside becuase of your leveraged position.
Whipsawing, to quote Investopedia, is where "a security's price heads in one direction, but then is followed quickly by a movement in the opposite direction". Consider this example;
Take an ordinary etf that drops 10% on a particular day. A triple leveraged etf would drop 30%. That puts the 1x ETF at $90 and the 3x at $70. Then on the next day the 1x ETF increases $10 back to its original value of $100, which is an 11.11% gain (10/90 is 11.11%). The 3x ETF will gain 33.33% of its $70 which is an increase of roughly $23. This puts the 3x ETF at a value of $93, for a loss of $7 (taken from ).
The SEC, as I said earlier, has warned against people using them for long-term positions. Brokerages are now restricting their use. Most importantly, the providers themselves caution against what you are recommending (“Particularly in periods of heightened volatility, the ETFs should be used by investors as short-term trading vehicles. As a consequence, we do not believe that investors should buy and hold the funds.” - Direxion, leveraged etfs provider, see
http://247wallst.com/2009/07/07/qua...ance-vs-target-index-fas-faz-bgu-bgz-erx-ery/
Bottom line, I'm not sure how someone can champion leveraged etfs for l/t positions when even the ETF providers advise against it.
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