500% gains in leveraged ETFs -- is it possible? ETF investing ETFs explained stock market trading market for beginners options trading strategies
welcome to looking at the markets with David Moadel
today's topic is five hundred percent gains in leveraged etfs is it possible
mm well let's explore see if it is possible
well I do think it's possible
a better question is is that realistic
well first of all what is an ETF just for a review
that's an exchange traded fund it
it's kind of like a mutual fund except you treat it like a stock or you can
treat it like a stock mutual funds are oftentimes priced once per day whereas
ETFs you can you can get them priced and you can buy and sell them any time
during the trading day much like a stock
alright so here this is an example or a few examples of some of the more popular
ETFs and especially leveraged etfs and leverage just a really quick review of
leverage that means you can control a large amount of equities with a smaller
amount of money
so instead of a one-to-one correspondence between money and
equities you might have a 2 to 1 or 3 to 1 correspondence
alright so for example if you have something like SDS this
that's an example of a leveraged etf and it's triple leveraged and so you're
controlling three times the amount as you would if you just went short the S&P
500
all right and by the way i always like to put these sources whenever I can
whenever possible so i can give credit and that this is from etfdb . com
alright so some of the more popular leveraged etfs
would include SDS that's the ticker symbol and that's all trash or three
times short for the S&P 500
so for example if you were to purchase ticker symbol SH that has a one-to-one
correspondence that's one x short the S&P 500 but this one go
would go this in the same direction as Sh
except it would go three times in that direction they moved three times as fast
you've got nugt which is the gold miners bowl bullish on gold miners all right
and that's three times leveraged etf you've got your SS 0 which is leveraged
for the S&P 500
you've got your you know yet all kinds of leveraged etfs you've got you know
triple leveraged for for long
financials you've got triple leverage bullish for the queues which is the tech
sector so on and so forth x sspx you that's a popular one and that's triple
leveraged short for the S&P 500 kind of kind of the same as SDS are pretty
similar to it and this one's for large crap large large cap growth
you get the idea these are just a few examples now let's look at the
performance here
yes it is possible to get five hundred percent gains in leveraged etfs for
example and you GT year-to-date gains or profits of five hundred thirty-six
percent approximately
alright so yes it is possible
but that's if you got in at exactly the right time and if you held on all this
time and but what if you got in at the wrong time
what if you bought it just today well let's look at the one day change for
nugt that's nine and a half percent loss in just one day
so is this type of game realistic
well my opinion is no but we're going to continue to talk about that
and as you can see these things these triple leveraged etfs are big big movers
all right you know you look at SPX you it's down almost twenty percent for the
year
you look at you know
SDS it's down almost eighteen percent pretty for the year
SSO is up a little bit over fourteen percent for the year
compare that to SP why the spiders which is up about seven percent for the year
so far
so these triple leverage
you know instruments these ETFs there that they're big movers and you have to
be really careful with them for that reason but there's an even bigger issue
with leveraged etfs and this is a pretty good explanation of contango and I got
this from investor junkie and a cool name
interesting name . com so let's just going to read this really quickly
because it gives a better explanation than I probably would if i tried to
paraphrase it
perhaps the biggest issue with investing in commodity ETFs and not just commodity
but all ETFs but you know right now they're talking about that type of etf
biggest issue perhaps is contango what is that
well contango is an issue that comes into play with any investment that is
futures based and these leveraged etfs they're mostly futures based contango is
a situation in which the near-month futures are actually less expensive than
those that expire later on as a result when the role process is underway
it can easily result in selling low and buying hi this is a situation that
investors don't want to be in since that means losses
yes they're constantly selling the the current nirmaan futures and rolling it
the rolling it forward they're selling the current month futures and then
buying the more expensive you know
further out month futures and that means that again
you're selling at a lower price and then buying the more expensive ones which is
going to cause losses
whenever they roll forward like that contango becomes more obvious when
investing with leveraged etfs that's what we're talking about today
leveraged etfs are ETFs that are designed to magnify gains or losses
compared to an index
so for example if you and invest in proshares ultra S&P 500 SL and you saw
that on the previous slide
that's designed to give two times the return of the underlying S&P 500 index
yeah so in theory if let's say SP why spiders went up
you know a dollar than SSO should go up two dollars
it should but here's the issue the issue is this every day
the indexing is reset since the ETF is futures based over time your returns do
not match
SMP 500 x 2 because of this a leveraged etf should only be used as a short-term
up to a few weeks at most and I don't even think i would go that far out a
short-term investment
so thanks to investor john key calm for explaining that really well and so yeah
they're constantly rolling the rolling forward
they're selling the the current futures contract and then purchasing a more
expensive
you know further out contract and so you're losing a little bit of money and
every day every day even if the trade goes in the direction you wanted to
you're losing money losing money because it's future is based and are constantly
rolling out and i found another source
this is from seeking alpha dot com an article on Seeking Alpha which has some
good articles there like to read them from time to time and this shows how bad
it can get
alright so SP why the spiders and that that's an ETF it's not leveraged it just
tracks one time the S&P 500 index and that's the brown line
okay over here and you can see you know goes down and up not too far it's pretty
moderate and actually during this timeframe from about two thousand ten to
about two thousand twelve we can see it did didn't go very far it kind of ended
up where it started
it's pretty flat but it had its downs and it's ups right now what if you had
purchased x sspx you which is triple leverage three times
short the S&P 500
alright and so that's the blue purplish blue line alright so as you can see when
the S&P 500 went down it went up and it went up
yeah I guess you could say about three times as much what you would expect
ok
but look what happened so in the short term
yeah maybe you could maybe you could use that possibly but look what happens over
time if you held onto it down down down down down
huge loss look at that it ended up about thirty percent down
yeah that's that's a really massive loss
now what if you had gone the other way though what if you had purchased you pro
upro take our symbol three times
leveraged long or bullish on the S&P 500
alright so that's the opposite trade and that's the green line here all right
well went down but then it went up and you'd expect it to get you think that if
it's if the SPX you finished on this chart down you'd expect you pro to
finish way up right
well it doesn't work like that because of contango that also finished about 25
let's say twenty five percent down so we've got in this time frame on the
chart you've got the three times
short S&P 500 leveraged etf finishing down about thirty percent and yet the
triple leverage long or bullish SMP 500 finish down about twenty five percent
you lost big time
either way and that's because of contango so even if the underlying
finishes flat you lose you can lose either way and you can lose big time
so what's the takeaway from all this
leveraged etfs might be okay for extremely nimble day traders and I say
might I don't even necessarily recommend it for that
but since they tend to roll forward every day
a lot of these ETFs maybe within the same day before the closing of the
trading day you might be able to use it
maybe but really why deal with contango when you can also get good leverage with
Colin put options for my money it's the smarter way to go and I mean options are
the smarter way to go
and yes options have their own issues they have time decay eating away at them
if you hold on to them for too long and and the underlying doesn't go the way
you want it to go
sure but at least you're not dealing with contango at least you don't have
these negative surprises either way so and I've made other videos about the
advantages and disadvantages of options but i would i would strongly recommend
against holding onto leveraged etfs for any real length of time and even if
you're going to use them for a short length of time
just be aware that you can you can have very negative surprises with them
my opinion is if if you don't truly understand them and really know what
you're doing
I would avoid leveraged etfs so if you need some help with this
if you'd like some more information about ETFs stocks or my preferred
investing and trading vehicle options you can contact me anytime
my name is David Modell and my email address is David Modell @ gmail.com and
by the way if you liked this video feel free to give it a thumbs up or subscribe
to my channel if you haven't done that already i'm trying to constantly come
out with new material stuff to really help you the viewer make smarter
decisions and avoid making huge mistakes if I could even help one person avoid
making a big mistake
whether it's with leveraged etfs or
penny stocks or binary options or any of these things that I don't really
recommend arm you know then
then I feel that this is all worth it for me so you know contact me anytime
and thanks a lot I hope to hear from you soon