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...

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

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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."

- 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 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.)

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