Because of the way they are functioning: buying more derivatives when prices go up and selling them and the collateral when prices go down. If instead you would buy futures or went on margin, you would be somewhere around 0 in USD and probably in profit in CHF.
I have not sold them. I think you would be still down if you buy on margin.
Just to be clear. As an example:
A) I entered biotech 3x when the underlying index (XBI) lost already 50% from ATH
B) then index lost another 15-20%, which roughly means another 50% on a 3x ETF
C) so my 3x ETF is down 50%
If I would have got futures or bought XBI on margin at point in time A (above). I would be still down, wouldn’t I?
For reference, let’s check facts UPRO (3x S&P500)
if you invested in covid bottom, you would have made 7x your investment when reaching ATH again
after the recent decline upro is still higher than pre-covid, albeit close
I believe you right! But let me elaborate some more on my experience and how can be helpful to others.
a) 3x ETF to be used only for short periods of time. I agree over long periods the probability of this vehicle to never reach prior peak is very real. It’s math, it always takes longer to go back up then going down on % basis
b) 3x ETF move wildly. Does not matter how much you looked the graphs. Once you are in, it’s a wild roller coaster
c) attention to cost. 3x ETF are derivatives as IR increase so could costs
When I think we could these
short period of time
use for a small part of your NW
have a plan on when to enter / exit
use after a downturn
don’t get greedy
don’t use if you are risk adverse
don’t use if you have a short investment horizon (less than 5-7y)
don’t use if you don’t understand well finance and have traded for at least 10 years
I can’t say I mastered all of these elements but I am still learning and improving on the go
That’s a good point.
With my current approach I could go for 1-2 years before hitting 2x with various further decreases.
Once I would hit that amount I would continue my monthly buying which should deleverage the position slightly.
Going further I am monitoring my maintenance margin a bit more to judge how high this would need to be in relation to the % of downturn.
In summary, I am starting my portfolio margin journey very carefully and am also very aware of negative stories (Markettimer in the boglehead forum. I just believe that for younger investors it’s an interesting concept (aka lifecycle investing).
To me, it’s interesting to see how leveraged portfolios might behave depending on different market conditions and sequences. It’s not only about that “freak” risk of having a 33% single-day downturn, but there are also longer-term risks.
Thanks, this actually helped me staying away from the temptation of leveraged ETFs
BTW, is there any unbiased (non-corporate) academic research on long-term investing in leveraged ETFs, adressing volatility decay, returns in different market conditions and reliable long-term backtesting? Haven’t found much helpful stuff, e.g. on Hedgefundie-type strategies. I wonder why?
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