Wednesday, April 15, 2009

The Debts of the Spenders: The Mathematical Decay of Leveraged ETFs

In volatile times, the retail investor has been offered the opportunity to "self-hedge"through leveraged ETFs (electronically traded funds) which are basically mutual funds on steroids.

These are daytrader tools and should be used only for those looking to make quick in and out exits and entries. Otherwise the mathematical decay inherent in the re-balancing of the net asset value (NAV) will debase the funds faster than Bernanke at the printing press.

Savvy traders know that it's better to hedge the old fashioned way - through normal options or even futures. Speculators can also buy single otm options several months in advance and simply wait for the inevitable decay to set in.

Even the CME agrees in its own report:

In volatile markets (similar to those in the third and fourth quarter of 2008), the self-hedged portfolio of leveraged ETFs actually delivered net losses upwards of 7 percent in a month.


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