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.

FACT

Someone buying TNA on November 19, 2008, and holding it until July 8, 2016. realizes a gain of 556% vs a gain of 164% on the S&P 500. Buying and holding this leveraged ETF returns 4 times the S&P 500! There you go, wasn’t too hard to shoot down the experts.

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.

FACT

At the end of November 2016. The S&P 500 was at 2198.98. As of June 5, 2017 the S&P closed at 2436.10 for a 10.78% gain. According to the experts, using a 3x ETF like UPRO should return 3 x 10.78% = about 33% less any time decay. In reality, UPRO did 36%! The daily compounding effect overcame any decay.

FACT

If you go all the way back to June 26 2009 up to June 6 2017 we find the S&P has risen 164%. 164 x 3 = 492%. UPRO did 1,353%. That’s about 8x better than the S&P.

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).

FACT

During the Bear market from November 19, 2008 until it’s bottom on March 9, 2009, the S&P 500 lost 16.12%. TZA is designed to go up when stocks fall, yet after stocks fall, TZA still lost 3%.

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.

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