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Leveraged ETF's: Do they decline more with lots of volatility?

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  • Apr 10th, 2020 7:43 pm
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[OP]
Member
Jan 26, 2020
376 posts
87 upvotes
Canada

Leveraged ETF's: Do they decline more with lots of volatility?

I've been looking at charts of inversed leveraged funds over several months. I bring up the index they track, then bring them up as a comparison, everything being identical (type of graph, etc). When there is little or normal volatility, especially before late February of this year they almost perfectly mirrored the fund they were tracking. Yet when our present rollercoaster market started a few weeks back they have declined markedly compared to what they were tracking. Its very easy to see on any chart. So I'm wondering if the problem is they have to rebalance more often in a more active market and the costs of this rebalancing is what is responsible for the dive in price? For instance I'm looking at PSQ which inversely tracks SPX (S&P 500). In the beginning of April of 2018 you see the price of PSQ is about $28.50. But if you look at the chart you'll notice that PSQ doesn't go up as much as you'd think it should around late January. By mid February its quite a bit worse. Around Feb 20 its at its lowest and its about 5% lower than you'd think it would be. The lowest point of the SPX seems to be on March 23. That's where PSQ should be pretty high but its only about $29.70 at its highest. I would have thought it would be $34-35. I'm using Think or Swim charts so I'd presume them to be accurate but with all the deficiencies I've noticed in that ancient platform nothing would surprise me anymore. (They keep on saying they are revising it but nothing seems to change.)
What am I missing here? Is it volatility that requires more rebalancing so additional costs come into play? Because this is a huge difference in a rather short period of time that I didn't see all year before this mess started.
6 replies
Member
Dec 13, 2005
301 posts
175 upvotes
Yes they can kinda evaporate quickly. Remember that 20% loss takes you from $10 to $8, but 20% gain from $8 takes you only back to $9.60. Then add leverage. Grimacing FaceFlushed Face
[OP]
Member
Jan 26, 2020
376 posts
87 upvotes
Canada
I would counter that with the enormous possible gains its a non-issue. We're talking about hundreds of percent occasionally.

> Then add leverage.

Not sure what you're getting at. Yes, leverage is in use and is the reason for the enormous occasional gains. Without it we would have 1/2 or 1/3 of those gains.

One of the biggest issues with this kind of investing is that for much of the time your position may be sharply down and this can be very disconcerting if you're used to steady, consistent, more or less predictable gains. Especially if it really sinks. Not many people can look at a $100,000 investment declining slowly down to half of that and still sinking and not give up. Its hard. This is where iron patience is key. On the bright side this kind of investing doesn't require active participation. You buy and just wait. Of course you should be alerted immediately for large movements but that doesn't happen often. So its a more peaceful way of investing for many active traders. Especially hyperactive camped on their monitor 12+ hours a day. Its a rather nice departure from that.
Deal Fanatic
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Sep 8, 2007
9008 posts
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Way Out of GTA
Haha.

God I love hearing what the other side of the trade thinks about these things and how they rationalize it.

Thanks OP! Buy some of this and JuSt bE PaTIENt!

Looks good!
6B69E631-C9FB-4E4B-BB7B-AC0186028E99.jpeg

Looks not so good...but I’m confident you will nail the timing!
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[OP]
Member
Jan 26, 2020
376 posts
87 upvotes
Canada
Yeah I know it can look depressing over several years. But I think there will be enough spikes when the index its tracking is not doing much to make it worthwhile. I'd kind of prefer to be investing in a calmer market. I'm thinking that trades would occur in weeks or months, not years. And its not as if I'm waiting for a huge spike to trade. Anything very unusual would be worthwhile.
Sr. Member
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Sep 19, 2008
886 posts
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The leverage works against you and the higher the leverage the more you lose through rebalancing. If you are bearish and want to make some money just get the 1x inverse etf like HIU or HIX. You still lose abit though decay, something like 8% a year, but not anywhere near leveraged ETFS.
Member
Nov 8, 2009
475 posts
192 upvotes
MichaelZZZ wrote: Yeah I know it can look depressing over several years. But I think there will be enough spikes when the index its tracking is not doing much to make it worthwhile. I'd kind of prefer to be investing in a calmer market. I'm thinking that trades would occur in weeks or months, not years. And its not as if I'm waiting for a huge spike to trade. Anything very unusual would be worthwhile.
You are right about one thing. These things tend to do best in low volatility situations like what the S&P had for many years. Unfortunately that's usually not the case. Take a look at the TSX for example. (I'm talking about the Bull leveraged ETF). If you had the same gains from 2009-2020 but with a significant amount of more volatility the investment would not be returning near the same amount as you see on those charts.

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