shamapant (90.79)

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Shorting Leveraged ETF's?

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October 12, 2011 – Comments (7) | RELATED TICKERS: SDS

I hear a lot of people say that investing in Ultrashort etf's is a bad plan for a long term investor because the way they function makes them lose money over the long term. For some reason there isn't much coverage on pros and cons of shorting the leveraged ETF's. I figure if long term they are bound to cause a loss to the investor, shorting them long term would be a nice easy way to pocket some profits. Specifically I am thinking about shorting the Proshares Ultrashort S&P 500(SDS) because I think the S&P will rally... am I missing something?

7 Comments – Post Your Own

#1) On October 12, 2011 at 8:07 PM, SultanOfSwing (99.79) wrote:

Study this guy's picks and draw your own conclusions. Overall he has a positive average and median score. But in reality if you're caught leaning the wrong way for too long, you can do real damage to your wealth potential.

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#2) On October 12, 2011 at 10:32 PM, Melaschasm (65.90) wrote:

There are some strategies where you short opposing ultras. The biggest challenge I have heard about is finding short opportunities at reasonable costs.

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#3) On October 13, 2011 at 2:19 AM, walt373 (99.85) wrote:

I have been doing this since May 09 with mixed results. The markets have rallied strongly since then so it has not been an ideal environment, but the occasional choppiness has made the strategy profitable. I've made about 10% a year, not that great but it's positive at least. I rebalance pretty aggressively so that cuts down on both risk and return. The tax benefits are actually more impressive than the returns so far, since you can choose to only cover for losses as you rebalance.

The biggest drawback for this strategy is that some shares are either hard to borrow or have a high cost to borrow, depending on your broker. I use Interactive Brokers and they always have shares, but they charge me a % each year to short the shares. This cost has been rising so I am thinking about cutting back on this trade. FAZ is the most expensive at 9%, FAS, TWM, and UWM are a bit cheaper at like 2%-6% last I checked.

Some of my old blog posts about this strategy: 1 and 2.

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#4) On October 13, 2011 at 12:49 PM, leohaas (98.75) wrote:

I have been doing this in CAPS since early August 2011. The results so far are staggering to me: "I have now harvested positive scores on a 3x ETF and its inverse 22 times, yielding 396 points and 40 for 40 on my accuracy (4 times my harvested score was positive, but dropped below the magic +5 number)."

It looks like walt373 is the real expert here, so I would trust his experience when trying this with real money. I am considering it, but have not yet decided to make the plunge.

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#5) On October 13, 2011 at 2:13 PM, SkepticalOx (98.60) wrote:

+1 walt373

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#6) On October 13, 2011 at 5:24 PM, APJ4RealHoldings (25.21) wrote:

@Shampant ; your blog post asks about one thing and then proposes to take a position in something else. you ask about shorting leveraged etfs and making successful profits drawing from their inherent weaknesses. for this, checkout my player fooletfs (and the related blogpostings with comments) which has done multiple rounds of shorting both sides of 3x ETFs (long and bear). however you propose taking a position on one side of a leverage ETF. that is asking for your head to get cut off. this is crazy speculation, i know because i do this in my realholdings account (and I dream that I can beat an automated style strategy such as fooletfs).

shorting anything, use interactivebrokers, they are amazing.

@walt373 hey walt! i use IAB too! hey i'm very curious about how you are able to come up with the borrow costs? also i see you wee able to cite a percentages for FAZ (9%), and others (FAS, TWM, UWM) - how do you do that?

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#7) On October 13, 2011 at 6:02 PM, walt373 (99.85) wrote:

One other thing I'd like to point out is that this strategy does way better in bear markets due to increased volatility. In fact, I only short bear ETFs on CAPS now. They obviously get killed in bull markets, but even do very poorly in bear markets because of the volatility. Bull markets can have long stretches of smooth up-every-day (worst case for leveraged ETF shorting), but I don't see that happening in a bear market.

@APJ4RealHoldings, you can see it in Account Management -> Tools. There is a short stock availability tool. In that screen, there is a tool to check availability and cost, but there's also a link to a text file that I find more convenient.

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