The Myth Behind Leveraged ETF’s
In late 2008 leveraged ETF’s were introduced to the public. Maybe you have read about these investment vehicles.
Experts are claim that buying and holding a leveraged ETF is wrong and claims leveraged ETF’s are only good for day trading. Are they telling you the truth or feeding you a bunch of bull and keeping the best secrets for themselves?
I decided to do a little research to see if there is any truth to the matter. One leveraged ETF I chose to examine was TNA. TNA is a 3x leveraged ETF that is designed to rise when the Russell 2000 rises.
The experts claim that these ETF’s are closed out everyday and thus decay in value over time. While this is true in a Flat market, in a Bull market these closing each days work to your advantage. It allows you to compound your gains daily.
Let’s use UPRO as an example this time.
It appears, as long as the markets remain bullish, the longer you can buy and hold these 3x leveraged ETF’s the more they compound. Over an 8 year time period, instead of doing 3x the S&P, one would have done 8x.
I wonder why they don’t want you to know about this? At StockLocater.com we won’t steer you wrong.
On the flip side, during a Bear market, I would have to agree with the experts at this point. Inverse ETF’s were not around during the last Bear market. I don’t have much to work with but there is TZA. This works the opposite of TNA. TZA is designed to rise when the when the stocks on the Russell 2000 drops (mostly small-cap stocks).
If an Inverse ETF goes down when the market’s rise, and an Inverse ETF goes down when the market’s fall, then I would have to agree that buying and holding a Leveraged Inverse ETF like TZA is not a good trading strategy.
In conclusion, don’t always believe the experts. Do your own research. In this example the experts should have been more specific. Not all leveraged ETF’s are unworthy of a Buy and Hold Strategy, some like TNA, UPRO, and/or SPXL have proven to be quite profitable in a Bull market.