The Market Toolbox: Investors Beware!
Published: Fri, 02/13/09
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The Market Toolbox : You are receiving this e-mail as a part of your free subscription. If you would like to change your e-mail settings please follow the instructions at the bottom of this e-mail. Welcome To: The Market Toolbox Intelligence Report Download The Desktop Financial Portal <-- FREE! Hi Toolbox Fans,
I have something very interesting to show you that most people would not expect.
We have been telling people about the great trading opportunities that are presented with inverse and leveraged ETFs.
We have also been telling people that these same ETFs are lousy investments.
There are a lot on misconceptions about what the leveraged ETFs are. Let's take SDS for example. SDS is the ticker symbol for the ProShares ultrashort ETF that tracks the S&P 500.
This ETF is supposed to move twice the daily volatility of the S&P 500 in an inverse manner.
What that means is...
If the S&P went up 2% today, the SDS should be down 4%.
That seems simple enough and many people think that if the S&P went down 40% this year, that the SDS would be up80% right? WRONG!
Here is a one year chart of the S&P 500...
The S&P 500 is down about 40% or so, so surely the double short ETF would look like this...
But it doesn't... I just took the S&P chart and flipped it vertically to show you what you would expect the double short ETF to look like.
The actual 1 year chart of SDS looks like this...
Interesting that the double short is NOT up 80%... It's only up about 30%!
Why is that?
The key word in what these double or triple inverse ETFs do is "DAILY". They only correspond on a daily basis to some degree at best.
Look at it like this...
Let's say you have a stock that is ten bucks, and it goes down 10%, then it's worth nine bucks. The next day it goes up 10% and now is worth nine dollars and ninety cents. Even if you held it both days, you are still down.
When you leverage this activity with a double or triple leveraged ETF you are compounding this simple problem.
More to the point the longer you hold it, the more at risk you are of being "churned out" of profits like this.
So while we agree that the leveraged ETFs make great tools for trading, investors beware.
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Best Wishes and Good Investing, Research Lab Premium Membership Includes : We Welcome & Appreciate Members Like You
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