November 28th, 2009
Kevin
Leveraged ETF news has been relatively slow in the past few months. There are only so many articles people can write about decay, compounding, and risks, and these topics have been covered thoroughly in the past year. I will continue to post links to news articles as I see them, but since there are so few articles it will probably be once a month or every few months. Aside from the news there are still many research articles I intend to write about leveraged ETFs. I have a long list of topics and ideas that I will eventually cover, and hopefully they prove beneficial to traders’ and investors’ understanding of how they perform in a variety of scenarios.
Leveraged ETFs are a relatively new instrument in the financial world. Although 2x ETFs have been around for several years now, the 3x ETFs by Direxion have really sparked people’s interest in using these leveraged ETFs as trading vehicles. Unfortunately, many mistake them as long term investment vehicles. While it is possible to buy and hold these leveraged ETFs for the long run, it is important for such investors to know the fundamental risks involved with such a strategy.
This page (Leveraged ETFs – Link and Resources) is an attempt to become a central resource for links to information regarding leveraged ETFs. As new information and articles are made available, those links will be added to the page.
List of Leveraged ETFs
Leveraged ETF List – A single list of most leveraged ETFs
Direxion ETFs – Popular 3x ETFs
ProShares ETFs – Popular 1x and 2x ETFs
Rydex ETFs – More 2x ETFs
PowerShares ETNs – 1x and 2x ETNs
Essential Links
Leveraged Decay – A simple introduction to the risks of leveraged ETFs that uses charts and images to describe the long term effects of leveraged decay. If you intend to hold on to leveraged ETFs for longer than a day, this is a must read article (I am biased, I wrote it).
Trend, Volatility, and Returns – Another must read study that goes more in depth on leveraged decay, but also covers other aspects such as compounding. Written by Connors Research, (the research division of The Connors Group) which is part of a network of sites such as TradingMarkets.com, PowerRatings.net, and TheMoneyBlogs.com.
Direxion Literature – A fantastic set of 5 articles describing the ins and outs and risks of leveraged ETFs.
Understanding ProShares’ Long Term Performance – A 2-page document that has a simple explanation of the relationship between compounding and volatility in leveraged ETFs.
On-Demand Webinar: Getting Leverage, Going Short – A must watch webinar that covers the history of Leveraged ETFs, an overview of how they work, and information on their tracking properties. Written by Matt Hougan, editor of IndexUniverse.com. The link includes a PDF of the slides if you do not want to watch the video.
Research Documents on Leveraged ETFs
The Dynamics of Leveraged and Inverse Exchange-Traded Funds
Path-dependence of Leveraged ETF returns
Long Term Performance of Leveraged ETFs
Popular Papers on Leveraged ETFs
Leveraged ETFs vs Futures
Warning: Leveraged and Inverse ETFs Kill Portfolios
Understanding Leveraged ETFs
Under the Hood of Leveraged ETFs
Other Articles
How Long Can You Hold Leveraged ETFs?
UltraShort ETFs – They work if you follow the rules
The Truth About 3x ETFs and Long Term investing
What Happens When You Hold Leveraged ETFs for More than One Day?
Leveraged and Short ETFs – 3 Flaws You Should Know
Explaining Inverse and Leveraged ETFs
FAZ 3x Financial Bear Fund Crushed
It can be interesting to see the historical day to day change percent of ETFs. It is no suprise that financials have been the most volatile in the past year. Here is a chart that shows a 50 day SMA of day to day percent moves for several ETFs:
(click for a large image)
The volatility calculation is just a comparison between each day. So if XLF was at 10 and the next day it moves to 11, that is a gain of 10%. If the next day it is still 11 then the change is 0%. Using a 50 day SMA makes the plot more smooth.
One of the interesting similarities between each ETF is that the drop in the volatility seems to ‘confirm’ the 2003 bull market. This may be obvious in hindsight, but perhaps the still heightened daily % changes we are still experiencing is an indication we are not yet out of the woods. The market became very calm at the end of 2003, even at its low levels.
The XLE chart is a great example:
Charts for each individual ETF can be viewed here:
DIA
SPY
QQQQ
XLF
XLE
IWM
