Drop 40%, then gain 40% = Recovered?

[peter_ross]

I had a discussion with my friend. When we say "index drops 40% from the peak in 2008, but now has gained 40% from the worst period".

My friend argued that the index ahas completely recovered, but I think this is not true. Comments?

For example:

Peak at 2008 = $100
Drop 40% of Peak = $60
Gain 40% from the worst = 60(1.4) = $84

[Jon Lai]

You're right, your friend's wrong. S/he obviously didn't take math

[Thalo]

And this is why you should stay away from Horizons Betapro funds, or at least set stop losses after you purchase and don't hold them for more than a week or so.

If we assume in your example the market did fully recover (it would require 67% growth from the low point to get back to 100. Also, excluding fees:

Peak from 2008 = 100
40% drop equals 80% drop on Betapro fund = 20
67% growth = 134% Betapro growth = 47, you've still lost more than half your money.

(inreality it's even worse due to the fact that this is happening in a smaller scale every business day)

[el_diablo007]

And this is why you should stay away from Horizons Betapro funds, or at least set stop losses after you purchase and don't hold them for more than a week or so.

If we assume in your example the market did fully recover (it would require 67% growth from the low point to get back to 100. Also, excluding fees:

Peak from 2008 = 100
40% drop equals 80% drop on Betapro fund = 20
67% growth = 134% Betapro growth = 47, you've still lost more than half your money.

(inreality it's even worse due to the fact that this is happening in a smaller scale every business day)

Spot on. Any security that tracks (in percentage movement) an underlying asset will experience decay in volatile markets. This isn't just limited to the horizons beta pro funds though, this goes for even the single (non levered) tracking ETF's (like GAS).

A stock however will often move on absolute price terms rather than on percentages, in which case, this is a non-issue.

[tophomeloans]

This is especially true in triple leveraged ETFs. These stocks will depreciate greatly because they are much more volatile.
However, it works with the inverse as well. If a stock goes up 10% and then goes down 10%, then you are down.

[YYC27]

Leveraged ETFs are completely useless for anything other than daytrading. The slightest bit of volitility makes holding them for a longer period very bad. Because they have to rebalance their leverage at the end of the day, they're always buying right after the market's risen, and selling right after it's fallen.

[tophomeloans]

Leveraged ETFs are completely useless for anything other than daytrading. The slightest bit of volitility makes holding them for a longer period very bad. Because they have to rebalance their leverage at the end of the day, they're always buying right after the market's risen, and selling right after it's fallen.

They are decent for shorting or options; however, buying and holding is not an option.

[Thalo]

Spot on. Any security that tracks (in percentage movement) an underlying asset will experience decay in volatile markets. This isn't just limited to the horizons beta pro funds though, this goes for even the single (non levered) tracking ETF's (like GAS).

A stock however will often move on absolute price terms rather than on percentages, in which case, this is a non-issue.

With the non-levered ETFs it's another thing causing the decay: the fact that they constantly have to roll over their positioning from the nearest term contract to the next nearest.

ie the current term structure for natty:
Oct 3.96
Nov 4.94
Dec 5.67

At some point in the next few weeks it'll have to sell its October contracts (to people who actually want to take delivery of NG in October), and because it has such a huge quantity to sell, in doing so it'll push the price down. Then the ETF needs to buy November futures, at currently a $1 premium, but again if the ETF holds a huge quanitity, it'll have some influence on the prices.

Earlier this year I was watching oil futures quite regularly and you could see the impact of USO on it like clockwork. Every month, during the two weeks leading up to expiration of the nearest contract you could see the spread between the nearest contract and the 2nd nearest contract expanding (sometimes even the 2nd closest contract's price exceeded that of the 3rd closest). Then, after the nearest contract expired, you'd see them even out again.