Leveraged ETFs

I had a question from a member about which leveraged ETF I liked better, really to me it's a function of the underlying asset and they should move according to their leverage  although there are always slight distortions. The amount of leverage in a trade for me depends on a lot of different things, for example the SLV long idea from Friday was expected to be a short term trade, to make it worthwhile (and keeping in mind it did have a strong positive divergence on a 3 min chart) I'd prefer to use leverage, whether that be in an ETF or options would probably depend on liquidity, but I'd probably lean toward Calls.

If I had evidence suggesting SLV could be a longer trade, maybe a swing trade, then I'd want to use a 2-3x leveraged ETF so I can sit through any corrections and not have to close out the options position and re-open it every time I thought there was going to be a correction (the more times I have to make a judgement about when to get in and out, the greater my chance for getting it wrong-I'd rather use less leverage and ride the corrections out).

If I'm looking at a core position, something I'm building my portfolio around and expect a longer term trending trade, then I'd prefer to be actually short the stock itself (assuming there isn't a very big dividend). This way I can let the trade work and not be overly concerned about it. Just about every core short from Q1 of 2012 was checked on average about once a week, as long as the market wasn't flashing red flags, I wasn't too concerned about those and every one of the 9 positions was showing a double digit return.

There are some advantages to actually being short rather than buying a bear /short ETF. For 1, you may not notice, but most days in the market are just noise and don't substantially contribute to the trend, it's usually a select few days that make the trade (another reason I don't want to be hopping in and out with options).

The 16 white days of the 39 days in this IWM uptrend are the only days that added anything to the trend; of those there were only 5 that added more than 1% to the trend; 23 days were just noise, nothing happened.


An ETF "Can" get chewed up in a lateral consolidation because of the compounding of leverage. Most ETFs are managed for 1-day returns, not a week or month.

Example: ETF is long and at $10, the next day it moves up 10% to $11, the next day it moves down 10% to $9.90, then it moves up 10% to $10.89 and the next day down 10% to 9.80. Now do the same calculation but add in 2 to 3 times leverage and the probability of the ETF seeing some slippage that may not be in your favor (the ETF doesn't return exactly 3x the underlying).

Another reason I prefer a straight short position is the ability to use profits to pyramid up the position, I wrote about it quite a while back at Trade-Guild.net. 

However the real point of this post is this, in looking around at some 2 and 3 times leveraged ETFs as well as the underlying asset, I noticed in several instances the lower leveraged ETF was showing better signals. Now to be fair it wasn't like that with all of them and I didn't do an exhaustive study or backscan the entire class of leveraged ETFs, but this actually does make some sense considering the market looks like this recently...

Considering the above, it would make sense to me that 3X leveraged positions would be accumulated as close as possible to a reversal point. As far as the actual performance it shouldn't make any difference.

However a few other things you should realize about ETFs, of the 1326 in my system that are members of the NASDAQ, NYSE and AMEX; 2 were on the AMEX, 89 were on the NASDAQ and 1225 were on the NYSE.

The reason I mention it is because the NASDAQ opens at 9:30 and the bid/ask are determined by the participants of the market maker if there is no bid/ask. An NYSE specialist can open a particular issue whenever they feel like it and the opening is arbitrary, the specialist looks at the book and opens the stock where they believe it should be, a lot of day traders figured out how to make money on NYSE stocks because of that in gap situations.

From my own personal experience, I had what would be something like a 6% profit on an ETF, SKF (2x short Financials), but the specialist didn't open SKF for trade until after 10 a.m. and by then my profit had disappeared, nothing I could do about it.

Just some random things to chew over.