{"id":90521,"date":"2016-05-30T15:26:58","date_gmt":"2016-05-30T19:26:58","guid":{"rendered":"http:\/\/countingpips.com\/?p=90521"},"modified":"2016-05-30T07:31:22","modified_gmt":"2016-05-30T11:31:22","slug":"triple-leveraged-etfs-carry-wealth-risks","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2016\/05\/triple-leveraged-etfs-carry-wealth-risks\/","title":{"rendered":"Triple-Leveraged ETFs Carry Wealth Risks"},"content":{"rendered":"
May 30, 2016<\/div>
\r\n<\/div><\/div>

By WallStreetDaily.com<\/u><\/a> \"Triple-Leveraged<\/p>\n

There was a time when fast-food patrons were satisfied with Burger King\u2019s Double Whopper.<\/p>\n

But eventually, diners yearned for more than just two<\/em> flame-broiled meat patties.<\/p>\n

Well aware of the growing inadequacy of its double-pattied Whopper, Burger King introduced the Triple Whopper, which comes complete with three patties and has 1,230 calories (with cheese).<\/p>\n

Bristling with ground beef, the Triple Whopper seems to have enough protein and saturated fat to fill the hungry bellies of America\u2026 for now.<\/p>\n

This level of excess may seem absurd to most of us, but our gluttony is on display in more aspects of life than simply fast-food menus -for instance, our investment choices.<\/p>

\r\n
\r\n

Free Reports:<\/p><\/div>\r\n

\r\n

<\/a>\r\n\t Get Our Free Metatrader 4 Indicators<\/u><\/b><\/a> - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter<\/p>

\r\n
\r\n
\r\n

<\/a>\r\n\t Get our Weekly Commitment of Traders Reports<\/u><\/b><\/a> - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.<\/p>

\r\n<\/div>\r\n

\r\n
<\/div>\n

There was a time when double-leveraged exchange-traded funds (ETFs) were sufficient, as well.<\/p>\n

Now, triple<\/em>-levered ETFs are all the rage.<\/p>\n

\"3x<\/p>\n

The 59 triple-levered equity ETFs currently trading have a combined asset value of $12.8 billion. By comparison, assets for double-levered funds total $8.4 billion.<\/p>\n

In aggregate, there\u2019s a lot of levered speculation going on here.<\/p>\n

Proponents of leveraged ETFs might argue that these funds provide day traders with a more liquid alternative to put or call options.<\/p>\n

However, judging by the swelling of fund assets, it\u2019s likely that many retail investors are mishandling leveraged ETFs.<\/p>\n

Volatility Decay<\/h2>\n

Triple-levered ETFs seek a return equivalent to positive or negative 300% of the underlying index on a daily<\/em> basis.<\/p>\n

Because of this daily resetting, levered ETFs are unsuitable long-term investments.<\/p>\n

Let\u2019s suppose that the S&P 500 Index has a bit of volatility over five hypothetical trading days, but ends the period at the same level at which it started.<\/p>\n

These theoretical returns are provided in the table below:<\/p>\n

\"Hypothetical<\/p>\n

The final column is the cumulative return for a theoretical triple-levered S&P 500 ETF, which provided exactly three times the return of the index each day.<\/p>\n

As you can see, the fund wound up with a slightly negative return, despite the fact that the S&P 500 finished flat over the five days. This divergence helps to illustrate the adverse effects of compounding and market volatility on leveraged ETFs.<\/p>\n

The minor loss depicted in this example may seem trivial, but the impact can be significant over longer periods of time.<\/p>\n

The PowerShares QQQ Trust <\/strong>(QQQ<\/a>), which tracks the Nasdaq 100 Index, has fallen 1.6% this year.<\/p>\n

Therefore, it may be expected that the ProShares UltraPro Short QQQ <\/strong>(SQQQ<\/a>), a triple-levered Nasdaq 100 bear fund, produce a gain. However, SQQQ is down even more, with a 5.3% loss year to date.<\/p>\n

Meanwhile, the ProShares UltraPro QQQ <\/strong>(TQQQ<\/a>) is down 9.1%, <\/strong>which is greater than three times the loss of QQQ. \u00a0<\/strong><\/p>\n

It\u2019s been a relatively tame year, too. At higher levels of volatility, triple-levered funds can suffer a dramatic loss of value.<\/p>\n

Plus, trading costs due to portfolio turnover (daily rebalancing), along with relatively high management fees, tend to make triple-leveraged funds very poor performers in all but the smoothest of trending markets.<\/p>\n

Thus, if you want to make a longer-term, directional bet, it\u2019s best to use options. After all, puts and calls have embedded leverage and benefit<\/em> from higher volatility.<\/p>\n

Holding levered funds too long isn\u2019t the only mistake investors are making, either.<\/p>\n

Hyper-Trading<\/h2>\n

In 2000, Brad Barber and Terrance Odean performed a study of over 66,000 household brokerage accounts. They found that most active investors underperformed. Overtrading\u2014likely resulting from overconfidence\u2014was a prime culprit.<\/p>\n

With their juiced returns, triple-levered ETFs cater beautifully to investors prone to overtrading in this financial market casino we now have.<\/p>\n

As you\u2019re probably aware, gold has been having a good year so far, and gold miners are benefiting handsomely.<\/p>\n

The following chart shows the monthly turnover (trading volume) for the Direxion Daily Gold Miners Index Bull 3x ETF<\/strong> (NUGT<\/a>) and the Direxion Daily Gold Miners Index Bear 3x ETF<\/strong> (DUST<\/a>). Keep in mind that both NUGT and DUST have lost over 90% of their values since inception.<\/p>\n

\"3x<\/p>\n

As you can see, the trading activity has soared for NUGT this year.<\/p>\n

Other commodity-related vehicles are currently changing hands at a frenetic pace, as well.<\/p>\n

The popularity of the VelocityShares 3x Long Crude Oil <\/strong>(UWTI<\/a>) and the VelocityShares 3x Short Crude Oil <\/strong>(UWTI<\/a>) have absolutely exploded. These exchange-trade notes (ETNs), which have imbedded credit risk, are also being overtraded. We\u2019re even getting media stories of retail investors making easy money by trading these products.<\/p>\n

These anecdotes are misleading, however.<\/p>\n

On average, people are losing money with mathematical certainty. And if investors were hurting themselves by churning their brokerage accounts before triple-levered ETFs existed, they\u2019re now losing money three times as fast.<\/p>\n

Triple-levered funds are essentially derivatives with tickers. They can be a valuable tool for adept short-term traders, but their growing popularity suggests misuse by the masses.<\/p>\n

Just as a diet of triple-decker burgers can be hazardous to your health, abuse of triple-levered funds can be dangerous to your wealth.<\/p>\n

Safe (and high-yield) investing,<\/p>\n

Alan Gula, CFA<\/p>\n

The post Triple-Leveraged ETFs Carry Wealth Risks<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

 <\/p>\n

 <\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com There was a time when fast-food patrons were satisfied with Burger King\u2019s Double Whopper. But eventually, diners yearned for more than just two flame-broiled meat patties. Well aware of the growing inadequacy of its double-pattied Whopper, Burger King introduced the Triple Whopper, which comes complete with three patties and has 1,230 calories (with […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-90521","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/90521","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=90521"}],"version-history":[{"count":3,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/90521\/revisions"}],"predecessor-version":[{"id":90535,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/90521\/revisions\/90535"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=90521"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=90521"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=90521"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}