In
2006, ProShares introduced several new
Leveraged ETF products that are designed
to double the return, after expenses, of
an underlying index. Rydex is expected
to introduce similar products.
Based
upon our analysis and experience with leverage,
we don’t recommend them. These securities
don’t deliver twice the return over
long periods of time, except in a down
market, and they have a flaw that will
make them lose their value over long periods
of time.
Some editors & publications have
been very responsive and helpful in getting
the word out, such as Seeking Alpha and
the Wall Street Journal. Unfortunately,
some others have ignored the issue and
insisted that we change our conclusions
before publishing, which we refused to
do.
We should also make clear that our recommendations
have nothing to do with these being “competing
products” to ours, or anything
like that. We would happily embrace the
products and write a dozen articles on
how to use them, if we thought they were
good for investors. Hopefully new and
improved Leveraged ETF products will
emerge.
Here are two articles that we’ve
written on the subject. Spreadsheets
are provided so that readers can follow
along with the analysis.
The Case Against Leveraged ETFs
http://etf.seekingalpha.com/article/35789
http://www.indexroll.com/x2-revisited.xls
Leveraged ETFs: A Value Destruction
Trap?
http://etf.seekingalpha.com/article/31195
http://www.indexroll.com/backtested-contant-leverage.xls
This spreadsheet compares SSO performance,
a 2x leveraged S&P ETF, to expected
performance given the daily S&P 500
changes during the nine months its been
around. Lag of 4.46% after nine months.
http://www.indexroll.com/daily-leveraged-etf-series.xls
Have any other questions? Just ask.
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