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Leveraged ETF Degradation

Started by Peter, February 09, 2014, 11:00:00 PM

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Zach

I was wondering if anyone is familiar with the concept of degradation related to leveraged ETFs?

I know that it can cause lowered performance relative to the 1X ETFs (non-leveraged), but wouldn't the concept also be applicable (in terms of compounding) if the underlying ETF moves up in general?

For example, the SPY had a return of 18.41% in the last year, and UPRO (3X leveraged) had a return of 65.98%.. The leveraged version had performance that was actually greater than 3X - does this support my conclusion?

If this my guess is true, and it does work in both directions, then there would technically be more to gain than to loose, because overall, the market wins more than it looses in the long-run.

Lovinglifestyle

Man, if that puppy gets loose from the long run you're going to lose it for good!
That's all I know about this subject, for sure, lol.  Somebody qualified will chime in soon!

bobeubanks

Leveraged EFTs don't really perform in practice as they are suppose to in theory.

Fred

Most leveraged and inverse ETFs "reset" daily, meaning that they are designed to achieve their stated objectives on a daily basis.

Their performance over longer periods of time -- over weeks or months or years -- can differ significantly from the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time.

The long-term returns of these ETFs are "path-dependent" -- http://www.math.nyu.edu/faculty/avellane/LETFSlides.pdf" class="bbc_link" target="_blank">http://www.math.nyu.edu/faculty/avellane/LETFSlides.pdf


OptionsTraderFL

If they are using futures I would think there would be a drag from rolling. Eventually they would have to reverse split the ETF like what was done with UNG and what is done with UVXY. I don't have any experience trading them long term.

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