Leveraged etfs

[StressLess]

Hi

Been wondering about leveraged etfs during wealth accumulation phase.

Pro shares ultra pro
UPRO

Essentially 3x the s and p.

Anyone using this as a form of leverage? Could be interesting in a tax sheltered vehicle with long term time horizon.

[jjandjab]

Know that when you buy these, you don't actually own stocks like you do when you have a regular ETF or mutual fund. They use options and derivative contracts to "attempt" to create the outsized gains (and more often, outsized losses). And they are not, ever, meant for long term investing. They in no way guarantee 3x return forever. They will have tracking errors even in the short term, potentially daily, never mind the long term... read the following and especially the "real world examples"

https://www.sec.gov/investor/pubs/leveragedetfs-alert.htm

I owned an oil ETF tracking the price of oil before I knew what I was doing. Well, there was so much volatility that my ETF lost value, and then had to reset itself by almost 20% down in one day do to contract problems, and then continued to be all over the place. I traded out and learned my lesson.

https://www.cnbc.com/2016/08/25/snake-oil-why-the-3-billion-dollar-uso-etf-is-down-this-year-even-as-crude-has-surged.html

And finally, not as tax sheltered as you might hope - again not analogous to a regular SP500 ETF

http://www.investopedia.com/articles/investing/081415/understanding-taxation-leveraged-etfs.asp

[DarkandStormy]

Have a friend who is long UPRO - entirety of his Roth IRA actually.  He's been rewarded for it the last 2+ years (didn't ask exactly when he bought).  It can work in a period of near-constant upswings.  But it's generally not a good long-term strategy (same with any of the ultra-short ETFs).

[jjcamembert]

They are not good to hold long-term. The reason is the rebalancing.

Example:
XYZ: $100
TXYZ (3x): $100

XYZ goes down 4%
XYZ: $96 (-4%)
TXYZ: $88 (-12%)

XYZ goes up 4%
XYZ: $99.84 (+4%)
TXYZ: $98.56 (+12%)
Difference: -$1.28

Or, other way:
XYZ goes up 4%
XYZ: $104 (+4%)
TXYZ: $112 (+12%)

XYZ goes down 4%
XYZ: $99.84 (-4%)
TXYZ: $98.56 (-12%)
Difference: -$1.28

So that's where your drag comes in, because the 3x is rebalanced daily only the daily move counts. You won't end up with "SPY gained 8%, so 3x SPY gained 24%" because it's not going to happen all at once.

If you want leverage and better tax advantages trade SPX and/or futures, but even then you're still going to have to pay for drag in those products as well.

[alexpkeaton]

If it's in a taxable account you'll probably get a K-1, which just adds a little bit of extra fun to your taxes. Not hard or anything, but annoying to wait an extra month or so for the damn thing to arrive, and more data entry to do.

It might beat the market in a bull market, but it'll be less than 3x. And in a bear market it'll be down more than 3x. It won't be symmetrical.

I do own SVXY in my Roth IRA. In normal times, VIX futures are in backwardation, meaning the ETF naturally makes some profit as it rolls contracts forward. It's not all that different than writing calls and puts for the income stream. So long as there isn't a market crash, SVXY will naturally tend to rise. In a crash it will lose significant value quickly. I wouldn't put a huge amount of my net worth into this.

[Indexer]

They are not good to hold long-term. The reason is the rebalancing.

+1

Thank you for sharing. I was going to say the same thing and type out a similar math problem. You saved me valuable time. :)


If you want to see what happens when a leveraged ETF goes against you for a long time... 

UVXY ProShares Ultra VIX Short-Term Futures ETF.  1month= -24.80%. 3 months=-38.53% 1yr= -92.7% 5yrs= -100.00%.

No, it wasn't really down 100% over 5 years. It was down at least 99.995% so it rounds to -100%. Some very lucky/smart people shorted it and have made a killing. Of course you can't short it now because it's impossible to find shares to short.

[DarkandStormy]

So that's where your drag comes in, because the 3x is rebalanced daily only the daily move counts. You won't end up with "SPY gained 8%, so 3x SPY gained 24%" because it's not going to happen all at once.

That's fine and dandy IF the exchange it is mirroring ends up flat over the course of time.  Except, they all go up over the long-term (at least, the last 100+ years).  Just look at the last decade if you bought and held UPRO.  Sure, there are some rocky days in there and volatility will kill you, but if it's a sustained long bull run you make an absolute killing.  It is a bit "timing" the market in a sense - I certainly wouldn't jump in now because of the daily rebalance risk - but if over the course of a week or a month the S&P is up overall, it's very likely UPRO (or any other leveraged ETF of the S&P500) will be up even more.

[RichMoose]

Hi

Been wondering about leveraged etfs during wealth accumulation phase.

Pro shares ultra pro
UPRO

Essentially 3x the s and p.

Anyone using this as a form of leverage? Could be interesting in a tax sheltered vehicle with long term time horizon.

I use some leveraged ETFs in my accounts. But I'm not a Boglehead or a buy-and-holder. It's worked out as expected for me.

[StressLess]

Thanks for all the replies. 

Definitely an interesting way to get leverage in a tax deferred account, that said not sure I'll even consider these anymore.

Thought I'd uncovered something magic here!