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ArethereanydrawbackswhentradingtheSPXL
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foralongtermtomakeprofits?
ArethereanydrawbackswhentradingtheSPXLforalongtermtomakeprofits?
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HasanyonetradedtheSPXLforalongterm(1yrormore)tomakeprofits.Isthereanydrawbackstothis
strategy.IambullishontheUSmarketinthelongrun,canIhaveSPXLasasmallportioninmyportfolio?
HasanyonetradedtheSPXLforalongterm(1yrormore)tomakeprofits.Isthereanydrawbackstothis
strategy.IambullishontheUSmarketinthelongrun,canIhaveSPXLasasmallportioninmyportfolio?
HasanyonetradedtheSPXLforalongterm(1yrormore)tomakeprofits.Isthereanydrawbackstothis
strategy.IambullishontheUSmarketinthelongrun,canIhaveSPXLasasmallportioninmyportfolio?
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4Answers
DanaHooshmand,Investmentconsultant,formerprivatebanker
WrittenJun29,2015
LeveragedETFslookexcitingandhot.Theycangoupalmost100%inagoodyear,likewehadin2013!
Butdon'tbetemptedthey'renotaneasypathtorichesandshouldmostlybeusedforshortterm
positionsbypeoplewhoareexperiencedatreadingthemarkets.
https://www.quora.com/ArethereanydrawbackswhentradingtheSPXLforalongtermtomakeprofits 1/4
30/1/2017 PrintSelection
Fundamentally,themainreasonisthatthelongtermperformanceofleveragedETFsdeviates
significantlyfromtheperformanceoftheunderlyingindextheytrack.Lookatthischart(source:CBS):
Argh!ThetwoleveragedETFshaveunderperformedwhentheunderlyingisflat!What'shappening??Let's
lookatwhatcausesthis:
1.LeveragedETFsprovidedailyleveragedexposure,andevenwithouttrackingerrorthedifferenceis
significantovertime.Thinkofthissimpleexample:SaytheSPXstartsat100andgoesup2%,then
down2%,thenup.04%.Imadethisexampleup,constructingitsotheSPXwouldbebackat100.
NowthinkoftheSPXL,againstartingat100.Ideally,a3Xmultiplewouldbeup6%,thendown6%,
thenup.12%.TheSPXLwouldbeat99.76.Thisdoesn'treflectmostlongterminvestors'intentions.
https://www.quora.com/ArethereanydrawbackswhentradingtheSPXLforalongtermtomakeprofits 2/4
30/1/2017 PrintSelection
2.Followingfrompointone,leveragedETFsdon'tworkaswellinvolatilemarkets(lookingatthe
lastsixmonths,that'sundeniablyhowI'dcharacterisethisyear...andwhyImostlygotoutofthe
marketmyself).Thehigherthefluctuations,thehighertheinstability.
3.Allfundshavetrackingerror.Thisisafunctionofallindexfunds,butyou'llseeitFARlessinthe
largeandmegastableindexfundstrackingtheSPXdirectly,liketheuberpopularSPY,orofcourse
indexfutures.
4.Smaller/morecomplexETFshavehigherratios/fees.Thefeesoflargeindexfundsisusuallyless
than0.05%.Forfuturesit'sbasicallyzero(excepttradingfees).LeveragedETFsoftenhaveexpense
ratiosof>1%andsometimes>2%.That'sawholeother12%you'dhavetooutperformby...atough
call.
5.LeveragedETFsarebuiltonsynthetics,whichsufferfromcounterpartyrisk.Thisvaries
massivelybetweenfundandistheleastsignificantofthereasons(asmanyfundsoperatewellbased
onsynthetics),butthestructureofleveragedETFsisquitedifferenttotraditionalETFsthathave
stocksasunderlyingassets.
Ifyou'rebullishontheSPX,you'rebetteroffeitheropeningafuturesaccountandtradingtheESMini
(rollingoverasappropriate)orusingamarginloanatlowinterestrates(andthey'restilllowthesedays).My
preferredmethodistheESmini.Tradingfuturesisrisky,butjustbecausethere's50xleveragedoesn'tmean
youhavetotradeyourwholeaccount!Besafe,andgoodhunting.
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AlanClement,Trader&Quanthelixtrader.com
WrittenJun30,2015
DanaHooshmandhasprettymuchnailedthereasonswhyyouneedtobecautiouswithleveragedETFs.But
I'daskamorefundamentalquestion,andthatiswhyyouarebullishtheS&P500?I'mnotnecessarilysaying
that'sabadcall,allI'msayingisyoushouldhavesomewayofquantifyingthatdecision,sothatyoucan
haveawayofdeterminingwhenthatanalysisneedstochange.
Ifyoutradealeveragedproduct(ETForfutureorwhatever),youareintroducinganelevatedrisktoyour
account.So,youshouldhaveanondiscretionarymethodofreassessingyourviewfrequently,toknowwhen
it'stimetoheadfortheexit.
Priceshocksarehappeningwithincreasingfrequency,andwhentheydo,correlationofassetpricesgoesto
1.Withleveragedproductsyoucaneasilydoalotofdamagetoanaccountinashortspaceoftimeinsuch
anenvironment,sobesuretohaveyourrisklevelsinplace,beforeenteringthetrade.
Goodluck!
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https://www.quora.com/ArethereanydrawbackswhentradingtheSPXLforalongtermtomakeprofits 3/4
30/1/2017 PrintSelection
BrianBain,studiedatFinance
WrittenJun29,2015
Thedownsidetoholdingahighlyleveragedfund(ex:3xlikeSPXL)formorethanafewdaysissomething
calledcontango(Contango).Thisbasicallymeansthatthefundcontinuouslyloosesmoneyduetothewayit
isstructured.Thegainscanovercometheloses,butit'stypicallynotagoodmethodforalongterm
approach.
Someinfotoconsider:HowToBuyAndHoldLeveragedETFs:TheTop7Outperforming3xETFsOver
ThePastYear
WhatisETFContango?
ImportantinformationaboutleveragedandinverseETFsandETNs
Hopethishelps.
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ElvisPellumbi,Buysideinvestorforover10yearsatvariouseventdrivenhedgefunds
WrittenJun30,2015
ManyofthedrawbacksofinvestinginvestinginleveragedETFshavealreadybeenpointedout.Iwouldadd
marketdepth/liquiditywhichissignificantlydifferentbetweentheETFandtheunderlying.Youneed
someonetotaketheothersideandespeciallywhenyouwanttoexitthepositionthebid/ask(inleveraged
ETFsinparticular)tendstogapinvolatilemarkets.
SoIhaveusedETFsandleveragedETFs(includingSPXL)ashedgesforshortperiodsofupto23weeks
butnolonger.
Iwouldadviseyoudothesame,justastheotherwritersheresaidbeforeme.
https://www.quora.com/ArethereanydrawbackswhentradingtheSPXLforalongtermtomakeprofits 4/4