Quantum Fading

8/10/2009 – ETFs Gain Assets Overall; Leveraged ETFs Lose Assets (planadvisor)
8/10/2009 – Class Action Lawsuit Against UltraShort Real Estate ProShares Fund  (Business Wire)
8/10/2009 – Leveraged ETFs: A Call for Coordination (TheStreet.com)
8/9/2009 – Galvin demands answers from firms that sell inverse and leveraged ETFs (Investment News)
8/7/2009 – Leveraged ETFs see July outflows after scrutiny (Forbes.com)
8/7/2009 – Lawsuit Filed against ProShares (ETF Guide)
8/7/2009 – Morgan Stanley Smith Barney curbs leveraged ETF sales (Investment News)
8/7/2009 – Suit Slapped on Leveraged ETF Provider (TheStreet.com)
8/6/2009 – The Leveraged ETF Debate Continues (Seeking Alpha)
8/5/2009 – Leveraged ETFs: Buyer Beware! (The Motley Fool)
8/5/2009 – Why Everything You’ve Heard About Leveraged ETFs Is Wrong (SeekingAlpha) [Top Pick]
8/4/2009 – Leveraged ETF Ban Spreading Like a Virus (Minyanville)

There has been an incredible amount of attention to leveraged ETFs the past few months regarding the dangers of holding positions for longer than a day. It seems nowadays there is almost an article a day about the risks and dangers of the decay that can eat away at a long term leveraged ETF position. Some of the most volatile market conditions in the entire market’s history occurred in the last quarter of 2008. Triple leveraged ETFs were affected the most, such as FAS and FAZ.

For 6 months it seemed like decay was in control and that all leveraged ETFs would fizzle away to 0 (reverse splits). However, since the market bottom in March, the trend has been so strong that the decay has been almost non-existent.

For example, FAS has the following stats from July 9, 2009 to August 4

Gain: +91.9%
Decay: -1.4%
Index:  +25.3%
Effective Leverage: 3.6x

Even though there was a bit of turbulence from the March 9 bottom causing some decay, TNA has seen an incredible trend to August 4

Gain: +240.6%
Decay:  -15.8%
Index: +64.9%
Effective Leverage: 3.7x

Also from the March 9 bottom to August 4, TYH has seen an incredible trend.

Gain: +231.3%
Decay:  -9.38%
Index: +58.9%
Effective Leverage: 3.9x

This period of strong trending is the polar opposite of the high volatility and sideways market of late 2008. The information presented here is merely useful proof that even though leveraged ETFs are affected by decay, in times of low volatility and strong trends, the returns can be significant.

8/01/2009 – Regulators Subpoena Leveraged ETF Sales Info (FOX Business)
7/31/2009 – Leveraged ETF Fallout Continues (Seeking Alpa)
7/31/2009 – Is the Backlash against Leveraged ETFs Warranted? (ETF Guide)
7/31/2009 – Are ETFs Blowing Up? (Index Universe)
7/31/2009 – Insincere Concerns: The Banning of Leveraged ETFs (Seeking Alpha) [Top Pick]
7/30/2009 – FINRA Has Firms Scrambling: Morgan Stanley Next to Review Leveraged ETFs (Seeking Alpha)
7/30/2009 – Momentum Grows Against Leveraged Funds (TheStreet.com)
7/30/2009 – Death of the ‘exotic’ ETF? (CityWire)
7/30/2009 – ETF Blowup Continues (Financial Times)
7/30/2009 – Financial Advisors Under Fire (CNBC)
7/29/2009 – Leveraged ETFs ‘under review’ at Morgan Stanley (Market Watch)
7/28/2009 – Leveraged ETF Ban Spreading Like the Flu (Seeking Alpha)
7/28/2009 – FINRA on Leveraged and Inverse ETFs (The Big Picture)
7/27/2009 – The ETF Gloves Are Off (Zero Hedge)
7/25/2009 – Two More Firms Ban Sales of Leveraged ETFs (ETF Daily News)