Leveraged ETF's - born losers, or just misunderstood? (Part 2 of 2)

Some of the leveraged funds pay dividends and have a substantial adjustment payout once each year.

DXD (double inverse DOW) 'dividend' payouts for 2008...
http://finance.yahoo.com/q/hp?s=DXD&a=06&b=13&c=2006&d=02&...
23-Dec-08 $ 16.055 Dividend
24-Sep-08 $ 3.823 Dividend
24-Jun-08 $ 0.138 Dividend
25-Mar-08 $ 0.223 Dividend
---------------------------------------------
Total divs = $20.24

Here's an actual example of buying the DXD inverse double etf, which covers the period around big dividend of $16.055.......

12/2008 Bought DXD @ 69.03
12/2008 dividend of $16.055 per share
02/2009 Sold DXD @ 74.7

All in all, it was a bonanza as I sold the stock at a profit and pocketed the big div too.

By comparison, the DIA (etf tracking the DOW long) went from $89 on Dec 8th, down to $72 on Feb 24th.

In conclusion....

DIA (DOW long etf) dropped 19% during the period.

DXD (dbl shrt etf) gained only 5.67% but also paid out a div of 23% (based on the buy price paid)


My own observations.........

1. It is true that pullbacks in the double inverse etfs lose more than they make in the previous gains...assuming that the DOW or whatever simply rose and then fell back to the same place.
Short term trading is the only way to use the double etfs.

2. They are, however, extremely useful if you have any luck or talent with market timing.

3. The return is not double on a buy and hold, but most likely will become a disappointment as value erodes.
Need to get some good entries and exits to avoid retracements which eat away at the returns.

4. This kind of problem is not unique to double etfs, USO (oil fund) for example has been a terrible way to pick a bottom in oil as contango (futures higher than spot) meant that USO made new lows even when the underlying oil price was well above its bottom.
(My video on contango and USO)
http://www.youtube.com/watch?v=QKsmaykLpvE

Category:

Education

Tags:

• leverage
• etf
• fund
• market
• stocks
• trading
• inflation
• deflation
• DOW
• investing
• buy
• and
• hold

[richardnday]

You are right about not buying and holding them. Here is a site that trades ETFs short term, and does pretty well. Check out SPXTimer

[herbs814]

Leveraged ETFs underperform because of the high debt payments required. If these loans are denominated in dollars (likely), these loans will not be affected because the contracts are already signed. But future funding would become more expensive to service if they must denominate their debt in currency that appreciates relative to the dollar.

[SilverRose09]

watch?v=UlDNMB6wYmI

[axostech]

How will funds pan out if the USD looses global backing status?

-Dave N FL