Leveraged ETFs for the buy and hold investor

[zb3]

Hi everyone,


Do any of you hold leveraged ETFs as part of your portfolio? I have been thinking of allocating around 10% of my $ to leveraged ETFs (will wait until the market corrects itself as it seems overpriced at the moment). Proshares offer quite a few leveraged ETFs and they have been achieving some very solid returns over the last 5 years (40-50% pa annualised).

For those that don't mind the volatility, they may be a good option. As leveraged ETFs compound daily, violability drag can dramatically reduce returns. For all those disbelievers, here is an interesting article calculating returns based on daily compounding of different indexes at different levels of leverage. For those who don't wish to read the article, the conclusion is that x2 leverage is the optimum level of leverage for the best returns over the long term. Here's a link to the article for those interested:

http://ddnum.com/articles/leveragedETFs.php

Anyway it would be interesting to see people's thoughts on the subject and to hear from anyone who actually invests in leveraged ETFs. Pity the FIF rules make international investment above 50k pretty unattractive.

[cornell]

There are some 2x leveraged funds where the manager offers a Bull and Bear pair. One is Long (and 2x leveraged) and one is Short (and 2x leveraged).
Now, you would expect them to have the OPPOSITE returns, for example, one up (say) 30% over a year and one down 30%, right? Not so, owing to the leverage and daily rebalancing, the likely returns would be a 20% gain and a 40% loss!!
It all has do to with a 1.0% loss, requiring a 1.01% gain (from the lower level) to break-even. Leveraging requires the fund buy more shares on an up fluctuation and sell shares on a down fluctuation to maintain the 2x leverage. Effectively "buying high and selling low" on daily fluctuations.
Better to buy an leveraged fund than a leveraged fund!!
Or an investment trust leveraged with a fixed term loan (and not rebalancing daily like an ETF).
(Of course, the correct strategy would be to SHORT both the long and short leveraged ETF - but that idea is so popular with hedge funds and profession investors that your broker won't be able to find any stock to borrow for your short sales.)

[blackcap]

Hi everyone,


Do any of you hold leveraged ETFs as part of your portfolio? I have been thinking of allocating around 10% of my $ to leveraged ETFs (will wait until the market corrects itself as it seems overpriced at the moment). Proshares offer quite a few leveraged ETFs and they have been achieving some very solid returns over the last 5 years (40-50% pa annualised).

For those that don't mind the volatility, they may be a good option. As leveraged ETFs compound daily, violability drag can dramatically reduce returns. For all those disbelievers, here is an interesting article calculating returns based on daily compounding of different indexes at different levels of leverage. For those who don't wish to read the article, the conclusion is that x2 leverage is the optimum level of leverage for the best returns over the long term. Here's a link to the article for those interested:

http://ddnum.com/articles/leveragedETFs.php

Anyway it would be interesting to see people's thoughts on the subject and to hear from anyone who actually invests in leveraged ETFs. Pity the FIF rules make international investment above 50k pretty unattractive.


Thanks for the article zb3. I uses leveraged etf products on the AEX in The Netherlands. There are a plethora of products with leverage ranging from 1.5x to 40x. I tend to use them as short term trading instruments and tend to buy the "long" position when I am expecting the market to bounce and a "short" position when I expect the market to fall. My broker there offers both short and long eft's with leverage on all world indices as well as Dutch stocks and large world stocks as well as commodities, currencies and bonds. Brilliant products if you wan to go short as well.