RSW (and almost any leveraged ETF) a very bad investment

[adriandunn]

Been a long time since I posted here, but thought I needed to point the following out, too many people are losing their shirts on leveraged ETFs.

RSW closed at 112.75 on Dec 31.  It is currently trading at 114.82, so you would be up 2% YTD on that investment.

SPY closed at 90.24 on Dec 31, and is currently trading at 83.50.  A simply short of the SPY would have made you almost 7.5% on the year, and using twice the capital to short the SPY would have made you almost 15% (plus the interest on the cash from the short, however that is neglible these days).

Even worse, if you had bought RSW near the end of September, you would be flat on your investment today, while the S&P 500 has fallen about 25% over that period.

Leveraged ETFs do limit your risk (you can't lose more than your original investment), but are a very bad vehicle to hold for more than a couple of weeks.  Basically they buy high, buying as the market rises, and sell low, which is the opposite of this site's name!

Financials are at about the same level as their November lows, but you could have bought FAZ (a 3x leveraged financial ETF) for over $200 on Nov 21, 2008, only to see it decline to $17.50 today, a huge loss of 91% even as the financials are essentially flat over the period.

Basically the more volatile the underlying asset, the quicker these leveraged ETFs lose money.  The only time they win is when there is a sustained move in a market over a period of time, ideally with not too much volatility (ie a nice slow decline in the S&P 500 from 830 to 400 would make you a fortune - a volatile decline, punctuated by violent upswings, to 400, and you might actually lose money.)

If you really want to go short the market, and can handle the volatility, you should short a 2x leverage bull ETF, like SSO.  Your profits are limited to under 100%, but are a much surer bet for a long term short.  This position is guaranteed to make you money if the market does no better than trade flat, and the amount of money it makes goes up with increased volatility in the market.

Just a word of warning for anyone buying these ETFs for anything more than a short term (1 day to maybe 2 week) trade.

[sunseeker]

Howdy stranger

I couldn’t agree more. These leveraged products should be used as a short term strategy, especially in volatile markets. There again by the same token that also applies to companies that give you excessive leverage.
Example:
If you started out with $100, and after the first day you lost a modest 5%, and on the second day you gained 5% back, and so on (lose 5%, gain 5%). On the 45th trading day your $100 would only be worth $89.9. Over 10% loss on a mere 5% fluctuation.

It’s been far too long since we heard from you. I hope that this wasn’t a one off, and you will start posting here regularly again.

ATB
modification.
oops I corrected the typo. I meant that I hoped that you would start posting on the site (not posing). LOL

[Bottomfeeder]

Adriandunn....nice to hear from you.  Quit being such a stranger.