Leveraged ETFs and Directional Moves

by Jay Pestrichelli on June 17th, 2013

A little over a year ago we put out a post about leveraged ETFs and a follower of the blog brought the topic up, so we thought we’d revisit it.  As a catch up,  here’s our post from March 2012: Leveraged ETFs
 
Investors have been warned for years about the risks of leverage ETFs and how the compounding math decays their value over time. However, these last 6 months or so have shown that when timed correctly, the compounding effect can actually provide a benefit. I’ll steal a paragraph from our other post since it sums it up nicely:
 
“In typical trading environments (whatever typical means), leveraged ETFs will underperform over time. In short times of strong trends, up or down, these leveraged ETFs will outperform. The trick with them is to time them right, and we all know that it's a hard game to win.”
 
I’m sure all you noticed that we have actually been in a period of a strong uptrend in equities, so we thought we’d point out how some of the popular leveraged ETFs have fared since December 1st, 2012
S&P 500
Underlying: SPX +20%
3X Bull:       SPXL +75%
3X Bear:      SPXS -50% 

Russell 2000
Underlying:   RUT +20%
3X Bull:           TNA +70%
3X Bear:         TZA -45%

Financials
Underlying:   XLF +22%
3X Bull:           FAS +80%
3X Bear:         FAZ -45%
These are all examples of where the leveraged ETF has outperformed by more than its leverage designation. In other words, the 3X Bull ETFs are up more than three times their underlying index and the Bear ETFs are down less than three times the same underlying index.
 
At Buy and Hedge, we don’t advocate timing the market. As we said before, it’s a hard game to nail down, but if you get it right, the leveraged ETFs can be vehicles that will help you do even better.


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