Thursday, September 29, 2011

The power of leveraged ETFs

The stock market indices have been down for the last 4 months. The peak was marked on May 2nd for this year. The trend was consistent till August 9th. The trading has been choppy since then. IWM which is a Russell 2000 index based ETF has been down ~ 20% in the last 3 months. SPY which tracks SPX has been down ~ 12% over the same period of time.

With IWM down 20%, you would expect TWM which is 2x inverse IWM to be up 40%. But, it is only up 32%. Most of the 8% loss (or decay if you call it) has been in the last 45 days since August 9th when the market was choppy. Same goes for TZA which is 3x leveraged daily ETF, tracking inverse to IWM, which is up only 41%. You would have expected TZA to be up by 60%, but it shows a decay of 19%. TNA which is 3x leveraged daily ETF tracking IWM is however down by 56%.

Also, note that the margins held in your brokerage account are 60% for 2x ETFs, 90% for 3x ETFs. These ETFs swing anywhere from 15+% to -15% on any given day. Can you take that volatility? Unless you are daytrading why would I recommend any leveraged ETF for you to hold overnight? You are better off trading plain vanilla ETFs like IWM, SPY - both long and short.

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