2x/3x inverse ETF

[Knight_Rider]

Since market is almost peak what are the drawbacks of buying inverse ETFs?

 

[alexchia01]

Since market is almost peak what are the drawbacks of buying inverse ETFs?

How do you know the market almost peak?

It's like saying the sky is so high because the previous plane fly until so high.

The sky is limitless, just because the plane fly this high the other time, does not mean it can't fly any higher.

 

[SpeedingBullet]

im currently long SDS, I also trade FAS/FAZ/SPXL.

Drawbacks of being long any leveraged ETF is that it resets daily, so there'll be massive tracking error the longer u hold it.

If you wanna hold it for >1 day, make sure it's when the underlying is trending in your direction, and you'll be fine.

 

[godslayers]

im currently long SDS, I also trade FAS/FAZ/SPXL.

Drawbacks of being long any leveraged ETF is that it resets daily, so there'll be massive tracking error the longer u hold it.

If you wanna hold it for >1 day, make sure it's when the underlying is trending in your direction, and you'll be fine.

Its a leveraged ETF, so any tracking error is magnified twice as well. Probably done using CTDs.

Traded using derivatives, products it buys may have counter party risk, especially since this fund is supposed to do well when markets turn (IE holding products with higher counter party risk vs long only funds)

Also the whole argument against synthetic vs actual holding ETFs apply here too.

SDS expense ratio: 0.89%
SPY expense ratio: 0.09%

 

[chopra]

The cost of holding these leveraged etfs can be huge. Shiny thing explained before

 

[wahkao3]

according to leading economic indicators, the market havent peak yet

 

[Knight_Rider]

When you buy? You say at the start of a trend right? How do you know when is the start of a trend? That nobody has the same answer so your question is irrelevant.

How do you know the market almost peak?

It's like saying the sky is so high because the previous plane fly until so high.

The sky is limitless, just because the plane fly this high the other time, does not mean it can't fly any higher.

 

[Knight_Rider]

according to leading economic indicators, the market havent peak yet

I know my backside not itchy yet. Just getting ready. Gold also haven't reach triple digit yet.

 

[Shiny Things]

Since market is almost peak what are the drawbacks of buying inverse ETFs?

I'm not going to tangle with your assumption that the market has almost peaked; that's a whole different debate, and one that really only lends itself to "OK put your money where your mouth is".

So, since you asked, and it's a good question, the drawback of inverse (and regular leveraged) ETFs is a thing called volatility decay.

These leveraged and inverse ETFs have a very strict definition. They aim to return the leveraged or inverse return of the index on a daily basis, give or take fees. And generally, they work pretty well if you hold them for one day or less.

But think about what happens if you hold them for a couple of days.

Let's say you start your index off at 100. On day 1, it drops by 10% (to 90); on day 2, it goes up by 11% (to 99.9). This is a volatile index! But the 2x leveraged ETF would be even more volatile: on day 1, it would go down by 20% (to 80), and on day 2 it would go up by 22%. But that means it's only gone to 97.6. So even though the index is unchanged, the 2x leveraged ETF has lost 2.5%.

Let's try the 1x inverse ETF. On day 1, it goes up by 10%, to 110. On day 2, it goes down by 11%, to 97.9. Whoops. Even though the index is basically unchanged, the 1x inverse ETF has lost 2.1%.

The effect is magnified when volatility is higher (which tends to be what happens when markets go down) and when the leverage is higher (you can do the math yourself on something like the triple-short version of our imaginary index - suffice to say it ain't pretty).

If you want to put on a long-term short position in equity indices, use futures, or CFDs, or just short the index ETF instead of using inverse ETFs. Inverse and leveraged ETFs are only appropriate for holding periods of one day or less. If you're holding them overnight, you're doing it wrong.

 

[Knight_Rider]

Yes Shiny I was planning to short these three when the time comes for say 1 year.

https://sg.finance.yahoo.com/q?s=HD6.SI&ql=0 Lowest $20 Highest $96.13

SDOW Chart - ProShares UltraPro Short Dow30 Fund - Bloomberg Lowest $24.32Highest $319.24

SPXU Chart - ProShares UltraPro Short S&P 500 Fund - Bloomberg Lowest $43.41 Highest $1666

Still doing homework so just wondering what are the pros and cons.

 

[hindsight]

Leveraged ETFs are only good for day trades or extremely short holding periods, you are better off short selling the index futures or SPY and managing your risks with unmovable stops if you want to bet on downside.

 

[sAVaGEmP5]

Since market is almost peak what are the drawbacks of buying inverse ETFs?

the drawbacks of buying these these inverse ETF is it forces u to constantly discretionally think that once the market has peaked, you can buy these inverse ETF.

Now do u every now and then try to find reasons to support claims that market has peaked, so that u can participate in some actions of these leverage ETF, sub consciously ?

Behavioral Bias - Cognitive Vs. Emotional Bias In Investing

12 Cognitive Biases That Endanger Investors | Random Thoughts | Minyanville's Wall Street

 

[Knight_Rider]

$43 vs $1666 who is not dreaming?

the drawbacks of buying these these inverse ETF is it forces u to constantly discretionally think that once the market has peaked, you can buy these inverse ETF.

Now do u every now and then try to find reasons to support claims that market has peaked, so that u can participate in some actions of these leverage ETF, sub consciously ?

Behavioral Bias - Cognitive Vs. Emotional Bias In Investing

12 Cognitive Biases That Endanger Investors | Random Thoughts | Minyanville's Wall Street

 

[Shiny Things]

Yes Shiny I was planning to short these three when the time comes for say 1 year.

Still doing homework so just wondering what are the pros and cons.

Yeah, righto, I get you. A couple of things:

1) If you short the short ETFs, you're effectively going long the underlying. Did you mean you're going to buy the short ETFs, or short the long ETFs?;
2) Doing this for a 1-year holding period is exactly what you're not supposed to do with leveraged or inverse ETFs, because you run straight into the volatility decay effect;
3) You may have read this thread and thought "so if the inverse ETF is guaranteed to underperform the index, and the leveraged ETFs are guaranteed to underperform as well, shouldn't I just short the positive leveraged ETFs and profit off the vol decay? Or even short the 3x positive and 3x inverse ETFs, be totally hedged, and make a mint?". If you did, give yourself a pat on the back, that's good thinking. Problem is, everyone else has already thought of it and is doing that trade as well, so the inverse and leveraged ETFs are all horrifically expensive to short.

If you want to short the market for an entire year, the absolute most efficient way to do it is through the futures. Sell the Sep 2015 S&P 500 futures, and sit on it. (Do this during the day in the USA, though, because the spreads for the back-month futures are horrendously wide in the after-hours.)

(You could also sell the Dec 2014s, because they're more liquid, and then roll your position a couple of times as the front month rolls off. This saves you a bit of cash, because the bid-ask spread is 0.25 in the front month against 0.75-1.0 in the back months, but it also means you have to remember to roll your position every three months. Depends how diligent you are.)

The other option is to short the common-or-garden SPY ETF, which doesn't cause any issues with vol decay. SPY is liquid enough that this is basically equivalent to shorting the futures; it really is six of one, half a dozen of the other.

 

[frenchbriefs]

leveraged etfs are bad,try looking into investing on margin instead.....investing on margin can easily double or triple ur buying power...owning 2 to 3 times more stocks or bonds etfs/index funds on margin means u can double or triple ur returns on investment.

in order to make margin investing work,the return on the investment product has to be higher than the cost of borrowing the money(margin).....

there is some us discount brokers that offer low margin interest rates......for example interactive broker offer 1.58% p.a. on margin loans or place trade financial offers about 2% margin rates.....interactive brokers is more reliable.....they have been offering low margin rates since 2009 so u dont have to worry about them jacking up interests.

right now i do not have that much money but when i have more money like 50k
i will probably looking into margin investing.

 

[Shiny Things]

$43 vs $1666 who is not dreaming?

Oh, one thing I forgot to add: don't get any ideas that it's ever going to trade at $1666 again. SDS provides 3x the daily inverse return of the SPX, and it's trading at $44 right now. If the SPX goes to zero on Monday morning - drops a full 100%, because, I dunno, an asteroid lands on New York City or something, and even then all the firms based in Detroit and Omaha and Houston and Dallas and Seattle and SF and LA would still be fine - then SDS will triple, so it only goes to $132. That's a looong way from $1666.

 

[frenchbriefs]

the drawbacks of buying these these inverse ETF is it forces u to constantly discretionally think that once the market has peaked, you can buy these inverse ETF.

Now do u every now and then try to find reasons to support claims that market has peaked, so that u can participate in some actions of these leverage ETF, sub consciously ?

Behavioral Bias - Cognitive Vs. Emotional Bias In Investing

12 Cognitive Biases That Endanger Investors | Random Thoughts | Minyanville's Wall Street

obviously the key is to wait for the market to be in a obvious downtrend,like during the 2008 financial crisis when everyday u wake up u can feel a palpable sense of fear in the air and doom and gloom and mass hysteria and the stock market keeps going lower and lower and everyone staring in disbelief and horror......even though u know the madness is only temporary and everyone is just overreacting,there is no way US economy could have lost half its value overnight.....the stock market is not an actual representation of the real value of the economy,it is merely a tool of sentiment of hundreds of millions of people swinging between moods of manic depression and irrational exuberance......

that is the time u buy these inverse etfs......although i dont support the use of these inverse etf thingys.....

u dont predict the peak of the market.....u simply wait for the crash and the recession to be in full swing.

 

[peterchan75]

Almost 32 years of data for DJI and S&P 500...
How many bottoms do you see? Several in between dacades.
That needs some long long sitting on the hands. If zoom into months then the action begins.