Short 3X Daily ETF's
January 06, 2010
– Comments (3) |
RELATED TICKERS: BGU
, BGZ
The Direxion Funds 3X ETF's offer an interesting alternative to trading options or trading on margin, but for individuals who are not strong in the day-trading force, it's probably a good move to pass on these.
A better move may be to short sell all of them.
Here's why: down days will always affect these tickers more than up days, so the long-term effect of a natural up-and-down market cycle will always leave these guys smaller than they started.
For example, pretend you have $1000 to invest in either a fund that tracks the DOW or BGU (roughly 3x the DOW). Now say the DOW drops 1% on day 1 and then gains 1% back on day 2. How would you do with a 1X fund (ignoring fees and commisions for now)? Well, 1% of $1000 is $10 and 1% of $990 is $9.90, so you've effectively lost $0.10. Dang, I'd miss that dime, but you can probably stomach it. What about BGU? On day 1, you'd incur a 3% loss, or $30. Then, on day 2, you'd get back a 3% gain on the $970 you have left. That's $29.1, a total loss of $0.90.
In other words, you didn't just lose 3X as much with BGU, you lost 9X. The same situation can occur in reverse with the bear 3X funds, so shorting all of them together will essentially guarantee that you can't lose as long as you close your positions before you get too greedy.
Personally, I just want the accuracy points in my CAPS portfolio, so I just close the positions when I'm slightly ahead of the 5% mark. What's your 3X ETF strategy?
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