Trend Takes Decay Out to the Woodshed
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.