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I came across an interesting question: "Why are daily rebalanced inverse/leveraged ETFs bad for long term investing?"

Despite the topic, the answers there actually illustrated the hypothetical risk of short-term trading in leveraged ETFs (i.e. in days), closing the subject with the assumption that, if the demonstrably extremely risky short term trading continued into the future, the value of the ETF would get inevitably get eliminated.

Trying to learn more about the subject, I was surprised that these leveraged ETFs actually appear to have a strong long-term track record.

For example, one of the oldest leveraged ETFs, 2XTechnology ETF ROM was launched in February 2007, just 10 months before the Great Recession. To date, it has more than doubled the performance of Technology ETF VGT during the same period, despite having being launched just before the Great Recession: 649.54% to 317.25%. (Many other leveraged ETFs have performed much better, but they were launched after or towards the end of the Great Recession, so I didn't use them as an example.) Even in this extremely unfavorable example where people bought the leveraged ETF just before the worst recent disaster hit, the leveraged ETF eventually beat the non-leveraged ETF in the same sector by a considerable margin.

The data I found is that these investments are extremely volatile and can kill you in the short term, but in the long term they are very profitable. (I think this volatility can be easily mitigated by keeping only a small portion in leveraged ETFs, but that's another subject). This is exactly opposite to the premise that these investments can be very rewarding in the short term but in the long term they inevitably fail.

Is there actual evidence that leveraged ETFs perform poorly in the long-term?

  • Your final paragraph's question is an exact duplicate of the one you linked in the first paragraph. I suggest editing to clearly focus on what about yours is different. – Ben Voigt Jul 22 at 3:17
  • @BenVoigt I've edited the question to be more focused on the historical record. Thank you. – Zesty Jul 22 at 19:10
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    You'd have to be able to also look at ETFs that did not survive - looking only at ETFs that survived long term creates a survivorship bias that will tend to make any prediction based on past performance overly optimistic (that is to say, wrong). So you'd have to be able to, say, take a basket of all available candidate ETFs in, say, 2007, and then see where they were in 2017 - including ones that melted down and thus never would become old in retrospect. The result wouldn't tell you the surviving ETFs were good ones instead of lucky only retrospectively, but it would be a start. – BrianH Jul 22 at 19:38
  • That's a very good point, @BrianH. I missed that angle completely. I will try to find out about the failed ones. – Zesty Jul 22 at 19:43
  • TVIX is an example of a leveraged ETF being bad in the long-run. It lost nearly 100%. – Zesty Jul 22 at 20:18

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