Tuesday, March 03, 2009
ETF Leverage - Test Case
As we discussed before, leveraged ETFs decay in trendless markets. Against the negative of decay is the positive of some hyper-compounding when the underlying moves in one direction for several days in a row.
Consider the S&P 500 - It has fallen in 11 out of the past 12 days. Here's its price action alongside the SDS, its double short ETF.
So from February 12th's close to today, the S&P 500 index has fallen:
(835.19 - 696.33) / 835.19 = 16.62%
Therefore minimally, on a discrete one-day fall, the SDS should have appreciated by:
2 * 16.62% = 33.24%
That would bring the SDS up to:
1.3324 * 78.41 = 104.47.
As you can readily see, the SDS today closed at 109.36 so an *11 out of 12-day* dive added about 5 points in leverage.
Is it worth it?
I'm not convinced at all that the decay risk is offset by this bit of increased leverage.
I mean, 11 out of 12 days is too rare, too extreme, to provide so little boost.
Leverage, for this index/ETF anyway, will be better purchased with futures or in the option pits.
After all, if you're really sure a ticker will decline or appreciate for the next several days, then why not just grab some front month option contracts?
ETF Daily Compounding
More On ETF Decay
Measuring ETF Decay
Leveraged ETF Risk