Leveraged ETFs ~ market folly

Monday, November 10, 2008

Leveraged ETFs

I find it highly ironic that in a time where the markets are looking to de-leverage and crank down the ridiculous amounts of risk, that soon ETFs will be coming to market that offer 3x the leverage. Currently, we're limited to ETFs with 2x the leverage such as the SSO for Ultra Long the S&P, and SDS for Ultra Short the S&P. Those things already see ridiculous intraday swings, so I can only imagine what 3x the leverage will look like. The 3x funds could make great trading vehicles, but could be very risky for investors; especially the ones who don't understand the risks or how exactly leveraged ETFs work. I highly recommend you read The Case Against Leveraged ETFs, a very good article which highlights some common misunderstandings surrounding these leveraged ETF's performance. They often are not simply 2x the performance on a yearly basis.

Courtesy of AlphaTrends, here is the graphic depicting the new funds coming to market.

(click to enlarge)

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