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I saw this question Why are daily rebalanced inverse/leveraged ETFs bad for long term investing?

And from the answers it looks like everyone agrees they're a bad idea, however the graph on SPXU for example currently looks like it's shooting up to the moon. Do people not like them because they tend to be volatile? In a bear market though, they tend to rise so why's it bad?

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    Being this is a 3x leveraged inverse ETF, the most powerful wealth destruction investment instrument in the world, that would blow your investment clean up, you've got to ask yourself one question: 'Do I feel lucky?' – void_ptr Mar 13 '20 at 1:12
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    @void_ptr - well, do ya, punk? – JTP - Apologise to Monica Mar 13 '20 at 1:13
  • @void_ptr if you just throw some money in there, the most you can lose is that money though and only if that stock goes to zero - which it won't in a bear market (?) so if something goes up it looks good to me. still confused why that's a bad thing. – user63150 Mar 13 '20 at 1:13
  • The "why is it bad" question is pretty much covered in the linked question. Do you have an issue with anything specific that was said there? – glibdud Mar 13 '20 at 2:04
  • Case in point: on 3/13/2020, many were expecting Friday sell-off - instead S&P 500 closed +9.3%, and SPXS closed -27%. One wrong bet like that, and your value gets destroyed. Still feeling lucky? – void_ptr Mar 13 '20 at 20:41
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The top and bottom of a bear market are known only after the fact. By suggesting that you can be confident that a bear market will continue, you run afoul of the efficient market hypothesis. We know that stocks have gone down but not where they will go from here. The words "ride" and "shooting" imply that you attribute momentum or trend persistence to the market, by analogy to "inertial motion" of large physical objects. Rather, the efficient market hypothesis says that the market moves in a random walk or "Brownian motion", as microscopic particles do, and any "trend" can only be seen in retrospect.

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  • the trend is your friend... until the end. – user63150 Mar 13 '20 at 4:09
  • Though in reality, the market is not 100% efficient. No one has all the information. And even if some do and could make use of it (e.g. hedge funds using machine learning), they only control a fraction of the money in play. I feel like other "operating requirements", such as minimum funding standards for pensions, also distort things. – abc Mar 13 '20 at 19:27
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If an ETF moves up X percent one day and then drops the same amount the next day, the result is a loss, even though the underlying recovered the same percentage. This is called beta slippage. If this were to occur over a long period of time, the leveraged loss would be significant. Volatility is the enemy of leveraged ETFs. Leveraged funds have to rebalance daily and that has an expense cost. These two factors result in a lot of leveraged ETF under performance.

However, if the underlying trends, beta slippage is less of a factor, possibly very little at all. In such trending periods, the leveraged ETF often meets the 2X or 3X benchmark and sometimes it beats.

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In a bear market stocks can reach a bottom and then just float near the bottom for a long period of time. Then the leveraged position does have an ongoing cost. But then consider the leveraged position as a hedge to another position that has a high dividend and there is a difference between hedging and speculating.

Also an inverse ETF leveraged three-times tends to lose correlation with fluctuation. A non-leveraged inverse ETF is actually much better.

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  • A "high dividend" for a hedged position seems irrelevant. Dividends do not create total return because, all else equal, the stock price goes down by the amount of the dividend. – nanoman Mar 13 '20 at 3:12
  • A dividend builds up in the stock value and price based on time and then pays out of it. To get the true benefit of the dividend just requires holding from the previous ex-dividend date. Also, many companies set their dividends as a percentage of their net earnings and that's their payout rate. Money taken out of the company as dividend is no longer at stock-market risk. – S Spring Mar 13 '20 at 3:16
  • When a dividend yield is high, it is generally because the dividend is seen as being at risk of not being covered by earnings going forward. If earnings expectations are faltering, then the dividend will not build up as net appreciation in the stock price before ex-dividend. My issue is that your remarks seem to view dividends as "free money" and would imply that even apart from hedging, the higher the dividend the greater the investor's return. In fact, simply buying high-dividend stocks doesn't beat the market. The market is smarter than that. – nanoman Mar 13 '20 at 3:26
  • Funds taken out of a stock as dividend is an amount of value no longer at stock-market risk. – S Spring Mar 13 '20 at 3:29
  • But certainly, a stock with particular prospects, but that doesn't pay a dividend, that stock could be hedged with a stock-market index and then held for its particular prospects. Or a stock with large unrealized capital-gains could be hedged with a stock-market index instead of sold. – S Spring Mar 13 '20 at 3:30

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