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I am watching a couple of ETFs and their name looks something like this:

  • xxx Daily yyy Bull 2X ETF
  • xxx Daily yyy Bear 2X ETF

I have obscured the names to minimize potential bias in the forth coming answers.

xxx is the name of the Managing firm and yyy is the name of the Thematic.

I am familiar with the Bull/Bear terms, however I am not familiar with how to interpret their meaning with respect to these ETFs names.

What does the Bull/Bear imply in these names and what does 2X mean?

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  • 2x means the fund is leveraged
    – quid
    Commented Jan 24, 2017 at 22:16
  • @quid What does leverage mean in this respect:?
    – grldsndrs
    Commented Jan 24, 2017 at 22:17
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    it means the fund has borrowed money. If the fund has $1 of equity it's investing $2 in whatever security the fund is investing to achieve the 2x return magnification. You really shouldn't hold leveraged ETFs overnight, and DEFINITELY don't hold long term.
    – quid
    Commented Jan 24, 2017 at 22:21
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    @quid That's a loaded statement if I ever heard one. Why would I not want to hold them overnight? Is the investor on the hook for those loans some how?
    – grldsndrs
    Commented Jan 24, 2017 at 22:24
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    It's not loaded. The leverage resets every day and the math of the leverage causes price decay regardless of the daily performance of the underlying asset/index. This is a pretty good answer regarding the math: money.stackexchange.com/questions/44037/…
    – quid
    Commented Jan 24, 2017 at 22:31

1 Answer 1

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Bull and Bear thematic funds are used to make directional bets on specific investing themes. The 2X and 3X versions mean they use various derivatives to increase the magnitude of the change in the correct direction.

Suppose that we had a Bull Spot Oil Fund and a Bear Spot Oil Fund. The Bull Spot Oil Fund would buy contracts such that when the spot (current) price of oil went up 1%, the price of a share of the fund went up 1%. The Bear fund would buy or sell contracts such that when the spot price of oil went down 1%, the share price of the fund would go up 1%.

The leveraged versions would potentially use options, futures and other sorts of contracts to get the behavior that the Bull fund went up the multiple of the change in the spot price and the bear fund went up the multiple that the spot price declined.

These sorts of funds involve some complicated sorts of trades and tend to have high expense ratios. They also tend to have what is called tracking error in that while the fund moves up or down the right amount daily, over time it does not move as much as it should for the aggregate movement of the theme it is tracking.

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  • How does one use these leveraged products to make money?
    – grldsndrs
    Commented Jan 24, 2017 at 23:35
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    @grldsndrs They are meant to be bought and sold in one day, if you have good reason to believe the market is going to move a certain way on a specific day. Most of the time they are not meant to be used, because on any given day the direction of the markets are fairly random. They are definitely not meant to be held long term, as they trend towards 0 by definition unless the market is moving up consistently WITHOUT fluctuating. As an extreme example:
    – Paul
    Commented Jan 24, 2017 at 23:43
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    @grldsndrs imagine that the index it tracks alternated its behaviour daily, on day 1 it went up 10%, on day 2 it went down 8% and it continued alternating days like that every day for a year where the market was open 252 days. If you invested $10000 at the beginning in a fund that tracked the index you would have almost $45000 (10000*( (1 + .1)*(1 - .08) )^(252/2), but if you invested in a 3x leveraged fund you'd be left with just $2184 10000*( (1 + 3*.1)*(1 - 3*.08) )^(252/2). That's not a flaw in the fund; that is what it is designed to do.
    – Paul
    Commented Jan 24, 2017 at 23:46
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    A 2x fund would leave you with $27291, not as good as just a regular index fund, but not as bad as 3x over that time period. That example is obviously contrived to emphasize the effect of the leverage, but the principal applies with real life data too (the funds trend to 0)
    – Paul
    Commented Jan 24, 2017 at 23:48
  • @grldsndrs These can be used in two different ways. In the first you believe you can predict what the market will do in the short run and make the bet accordingly. In the other, you use the fund to hedge out part of another be you've made. Suppose that you think that an oil company stock movement is 80% the company and 20% the price of oil. You could hedge out the oil price change by using a leveraged bear oil etf in the right proportion so that the value of your total bet didn't change as oil moved.
    – zeta-band
    Commented Jan 25, 2017 at 0:13

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