Friday, May 22, 2009

The Foole has been Fooled... leveraged ETF's have issues.

Here is a chart of SDD the 2x leveraged Ultrashort Smallcap 600 fund...



Click for larger, Browser back.


Here is a chart of SAA the 2x leveraged Smallcap 600 fund...



Click for larger, Browser back.

Notice that these charts do not reference Price, they are referencing position to the SPY, broad market index. Next, notice that they are both below the SPY. I am here to cry FOUL! Since they are opposites, one or the other of them should be in the money.

Sadly, this is not peculiar to this pair. From what I can tell, most if not all of the 2x and 3x pairs are not appropriately balanced. In fact, the Proshares website indicates: "This ETF is designed to meet daily objectives; results over longer periods may differ."

Conclusion:
- These are wonderful vehicles for intra-day trades. They provide access to markets previously unreachable and they leverage your gains/losses.

- It was suggested to use these as long term investments by our friends at the Motley Foole, but they didn't do the math (my friend IIC at SharpTraders.com did).

- It should be good (wonderful) for a longer term trade to short the opposite of the pair.

- Ultimately, to make reliable gains, we should invest in fundamentally sound stocks during a bull market. (I like the book Rule One Investing for this.)

No comments:

Post a Comment