Is it better to short the opposite leveraged ETF? - Business, Finances and Investing Forum

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Is it better to short the opposite leveraged ETF?

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11-12-2008 , 03:19 PM

mak15

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Join Date: Jan 2006 Posts: 2,214

So one of the big problems with the leveraged ETFs is that since they aim to track the daily returns of their indexes, over time down days hurt them more than up days help them relative to the index they attempt to track.

So, my question is does it make sense to just short the opposite leveraged ETF so that you would actually benefit from the compounding returns? i.e. short SDS rather than buy SSO if you want 2x leverage on the S&P?

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11-12-2008 , 04:46 PM

gull

old hand

Join Date: Sep 2006 Posts: 1,236

I'm not sure.

Despite the fact that these instruments underperform, I do know that it's not profitable enough to make it worthwhile to short them. However, it may be a more efficient way to get double leverage. Still, I would expect that futures would be the cheapest way to get leverage (or options, if you want noncallable margin).

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11-12-2008 , 09:51 PM

Answer Anderstood

adept

Join Date: Jun 2008 Posts: 847

The reason these leveraged ETFs can hurt over the long term is because of the fact they are tracked daily while the regular ETF is not. This fact will not change regardless if you're short or long.

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11-13-2008 , 08:38 AM

mak15

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Join Date: Jan 2006 Posts: 2,214

Quote:

Originally Posted by Answer Anderstood

The reason these leveraged ETFs can hurt over the long term is because of the fact they are tracked daily while the regular ETF is not. This fact will not change regardless if you're short or long.

The reason the daily tracking hurts them is because down days hurt more than up days relative to the index. A simple example is: you have $100, one day is up 10% the next is down 10%, so you have 100->110 -> 99, or if it's down first you would have 100 -> 90 -> 99.

So if we were short, this would make us a dollar, not lose us one, no?

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11-13-2008 , 09:13 AM

stinkypete

Carpal \'Tunnel

Join Date: Jul 2004 Posts: 15,783

if you're short you effectively collect the management fees too. but your borrow cost is almost certainly higher than that so it's kind of irrelevant.

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11-13-2008 , 09:39 AM

Huck Cheever

banned

Join Date: May 2007 Posts: 512

Quote:

Originally Posted by mak15

you forgot the other half of the math btw. two days down 10% gets you to 81, two days up 10% gets you to 121

average all 4 values (efficient market for the simple example) and you get exactly 100

Upon further reflection I'm not even sure what you were trying to show in the first place

edit: oh right somehow I glossed over your question. if you were short, no you'd still be down to 99 I believe in both cases

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11-13-2008 , 09:56 AM

Answer Anderstood

adept

Join Date: Jun 2008 Posts: 847

OP your idea doesn't make sense.

If the regular 2x ETF is up 10% in one day then the inverse 2x EF is down 10%, if you are short the inverse 2x ETF then you are up 10% just the same as if you were long the regular ETF so you're not avoiding the daily gyrations effecting your bottom line.

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11-13-2008 , 02:46 PM

stinkypete

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Join Date: Jul 2004 Posts: 15,783

Quote:

Originally Posted by Huck Cheever

the entire point of the post was that you can't take arithmetic means...

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