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d1david (28.63)

One hit wonders- be cautious with leveraged etfs!!!



January 16, 2009 – Comments (8) | RELATED TICKERS: FXP , SPXL , TZA


I use leveraged etfs.. but as a day-trading tool or very short term tool only.  I am posting this link to a very useful article about how investing intermediate-term (several weeks) or longer is foolish and very costly.   Buyers beware. 



8 Comments – Post Your Own

#1) On January 16, 2009 at 10:30 PM, anchak (99.91) wrote:

David.... a lot of us have noticed this problem with the leveraged ETFs and have been sort of campaigning/warning around in the Fool.

The things which is not mentioned in the article is not just the movement of the indices - its also the cost of leverage ie derivative/swap/future premiums paid ON THE DAY.

Hence FAZ which is the 3x Financial Bear broke 200 on Nov 21 , on day when VIX was close to 90 - fell to low 30s while the financial index rose about 20% and now today when the Financials are taking out new lows - its at $60

These instruments are thus great only when a dominating "UNIDIRECTIONAL" trend prevails - and typically the best strategy at that time is always to do what we usually do in CAPS - instead of playing"n"x long - play the opposite strategy on the "n"x Short ( if you can do that in RL)

A lot of these may very well not survive - due to the yo-yo effect the end of this bear market - ie both the short and the long.

Some Long ETFs in distress : UYG,URE. FAS may go there - if there's a bounce and then another run on the financials. Also DXO  



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#2) On January 16, 2009 at 11:58 PM, Option1307 (30.50) wrote:

Agreed, although they are great right now if you can use them correctly. But you are right, only for short term swings.

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#3) On January 17, 2009 at 2:20 AM, binve (< 20) wrote:

Agree 100%. Good as short term trading tools. Very bad / dangerous as long term investments.

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#4) On January 17, 2009 at 2:07 PM, Tastylunch (28.71) wrote:

Good post and point David.

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#5) On January 17, 2009 at 3:26 PM, abitare (30.30) wrote:

Good find. I have been in and out FAZ, SRS, SKF and concur with the article. These ETFs are very flawed. (I still own some FAZ).

On the FAZ and SKF message board people are always complaining that the ETFs are rigged, because the keep falling when they should be rising. 

Not to mention when Paulson did his short ban they were all cut in half in a day. But they recovered.

These leveraged ETFs should be considered as derevatives and are dangerous like derevatives. 

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#6) On January 17, 2009 at 9:51 PM, hotrods1431 (93.92) wrote:

What does my fellow fools think about ERZ?

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#7) On January 18, 2009 at 9:51 PM, d1david (28.63) wrote:

thanks for the comments everyone.


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#8) On January 18, 2009 at 10:38 PM, anchak (99.91) wrote:

Hotrod..... I am pretty sure you meant ERX ie the 3x Energy Bull. Wanted to respond - but instead decided to do a full post my blog on this

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