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I just saw some guy at CNBC talk about the same thing today after the close so great timing! He was talking about the DIG and DUG ETFs but same idea! It’s very dangerous out there and thanks for the heads up!
Yup, leveraged ETFs, whether they’re long/bullish or short/inverse/bearish are NOT good long-term plays. Buying an inverse NON-leveraged ETF and a regular NON-leveraged ETF that both cover the same market/index simultaneously would get you close to even/breakeven over a period of time. Buying an inverse LEVERAGED ETF and a regular LEVERAGED ETF that cover the same index simultaneously is virtually guaranteed to be a losing strategy over time. Both the long AND the short will lose ground.
If one is up and the other is down, the one that is down will be down more than the one that is up, over time. But it’s also probably they will BOTH be down over time. This of course means SHORTING both Leveraged ETFs in a margin account is a *relatively* low risk strategy that is virtually mathematically guaranteed to make money.
Bottom line, do your homework people. I own a couple of non-leveraged ETFs as long-term investments. I also make small day trades on occasion with leveraged ETFs (2X and the new 3X ones), but I never mix the two up. Investing and trading are very different things.
The fees are creeping up with some of the odder ETFs out there, too.
Leveraged ETF’s should only be used for trading purposes and never held long term in a portfolio. They also have the potential to expose you to massive losses.
Kevin: Thanks for the insight! I was wondering about shorting both leveraged ETFs as a good strategy, but that might be too complicated for the average investor (shorting a leveraged bear fund).
Monevator: I really hope that the ETFs won’t become another set of mutual funds with high fees down the road!!
Mark: Definitely agree with you about the massive losses as some of those funds are down big this year. I guess if you know what you are doing, these funds can give you quick gains but we all know what happened to people that leveraged to no end!
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