How is this? It must not only be correct in the trend of the index but you have to hit him to the timing. At the beginning of the day, the proportion of debt and equity (equity) in the leveraged ETF is the same. If the leveraged ETF rose at the end of the day, you have more equity than debt, so it will buy additional shares. If on the other hand lowered, the ETF sells shares. It is the same thing that happens in a margin account (for knowing the implications of this term, see how to open an investment account by Internet which accompanies the Global value investment newsletter, click here for more details), or margin, since if your leverage exceeds a certain level with respect to the securities in the portfolio, the broker will settled part of those actions to maintain a certain level of balance between debt and equity. The timing is awful: the ETF at the end of the day buy high and sell down to rebalance the relationship equity-leverage. This graph that leveraged ETFs is called daily rebalancing or daily rebalancing to keep a constant leverage ratio. These ETFs have also a very high volatility, many arrive to possess implied volatilities between 70-150%, and some even more.
The governing body of the financial industry in the U.S., the Financial Industry Regulatory Authority (FINRA) issued an alert about the risks that involves operations in leveraged ETFs for those who stay more than one day in them. Let’s look at a practical example: the Dow Jones U.S. Oil & Gas Index (DJUSEN), rose by 1.6% between 01/12/08 and 30/04/09 and its corresponding leveraged ETF, the ProShares Ultra Oil & Gas (DIG) which replicates twice the DJUSEN index, fell 5.6% in the same period. Then, what is the strategy to use if you want to operate these leveraged ETFs? You must first have in mind that they do not serve to build long-term strategies. Buy if you believe that the Fund will have a strong rise or lower, but do not use it to make money in the long term. These funds operate only if the market is with a tendency to rise or low well defined, never lateralizando. Second: they have the advantage that as they are leveraged, simply spend much less money.
If he is convinced of a strong rise or lower, the leveraged ETF mechanism will allow you to make a good profit. If you plan to buy $10,000 of SPY because he sees an imminent hike, you can buy $7,000 of SPY and allocate $3,000 to the corresponding leveraged ETF, the ProShares Ultra S & P500 ETF (SSO) that doubles the performance of the SPY if it does not want to be exposed to too much risk. The leveraged ETFs allow us to win a lot of money in the stock market, but must well understand its use before using them.