difference going long on a leveraged etf and short on its inverse?

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leenaerts
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difference going long on a leveraged etf and short on its inverse?

Post by leenaerts » Wed Nov 07, 2018 10:01 am

What would be the difference with going long on e.g. SSO and going short on SDS? Should they give me the same returns? If not what is the difference?
Would expense ratios be important. I assume high expense ratios for an etf you are shorting is a good thing ?

*looking for answers on these questions, not interested in advise against leverage.

tmcc
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Re: difference going long on a leveraged etf and short on its inverse?

Post by tmcc » Wed Nov 07, 2018 10:11 am

I can't help myself and love trading these. LABU / LABD is another good pair. if you're intent on levering up, consider traditional margin on a regular old ETF like SPY. you can achieve 4x and margin interest is probably less than the impact of the slippage if you have to ride out a bad trade.

here is a non-exhaustive list of risks when holding positions overnight.

* daily slippage versus underlying index performance
* leveraged ETF losses on the way down underperform during subsequent recovery compared to the underlying index

leenaerts
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Re: difference going long on a leveraged etf and short on its inverse?

Post by leenaerts » Wed Nov 07, 2018 10:28 am

tmcc wrote:
Wed Nov 07, 2018 10:11 am
I can't help myself and love trading these. LABU / LABD is another good pair. if you're intent on levering up, consider traditional margin on a regular old ETF like SPY. you can achieve 4x and margin interest is probably less than the impact of the slippage if you have to ride out a bad trade.

here is a non-exhaustive list of risks when holding positions overnight.

* daily slippage versus underlying index performance
* leveraged ETF losses on the way down underperform during subsequent recovery compared to the underlying index
Margin interest will cost me more I assume ? And what do you mean with daily slippage ? I compared sso with an imaginary etf with double spy daily returns and sso is unbelievable close. Yes, using leverage on average leads to small losses, but has the ability to have huge wins too if the market keeps going up for long stretches.

Yes they underperform with high volatility. They outperform when the market goes straight down or up. I

tmcc
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Re: difference going long on a leveraged etf and short on its inverse?

Post by tmcc » Wed Nov 07, 2018 10:41 am

the ETF attempts to mirror the underlying index. that is not a guarantee that it will match. it may be more or less than actual underlying index performance. this could be good or bad.

when a 3x or 2x ETF loses versus the underlying index, the percent change will not add up to the underlying index on an absolute dollar basis even if the percent performance is identical. below is an easy example that lays out a $1000 trade on a 3x etf and subsequent days' activity. hope this helps

Code: Select all

		spy		sso
				
day 0		 1,000.00 		 1,000.00 
				
day 1	1.00%	 1,010.00 		 1,030.00 
				
day 2	-5.00%	 959.50 		 875.50 
				
day 3	-2.00%	 940.31 		 822.97 
				
day 4	6.35%	 1,000.02 		 979.75 
				
				 (20.27)
				-2.0%

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Phineas J. Whoopee
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Re: difference going long on a leveraged etf and short on its inverse?

Post by Phineas J. Whoopee » Wed Nov 07, 2018 5:16 pm

leenaerts wrote:
Wed Nov 07, 2018 10:01 am
What would be the difference with going long on e.g. SSO and going short on SDS? Should they give me the same returns? If not what is the difference?
Would expense ratios be important. I assume high expense ratios for an etf you are shorting is a good thing ?

*looking for answers on these questions, not interested in advise against leverage.
Hi leenaerts.

It might be useful to read our wiki article about inverse and leveraged ETFs.

PJW

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grabiner
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Re: difference going long on a leveraged etf and short on its inverse?

Post by grabiner » Wed Nov 07, 2018 10:20 pm

leenaerts wrote:
Wed Nov 07, 2018 10:01 am
What would be the difference with going long on e.g. SSO and going short on SDS? Should they give me the same returns? If not what is the difference?
The daily returns will be the same, but your exposure will change, so that the multi-day returns will be different.

If you put $1000 into a long 2x leveraged fund, and the market rises by 5%, you now have $1100 in this fund, so your stock-market exposure increased to $2200.

If you short $1000 in a short 2x leveraged fund, and the market rises by 5%, your short position is now $900, so your stock-market exposure decreased to $1800.

Thus, unless you adjust your position, you won't get the same two-day returns.
Wiki David Grabiner

leenaerts
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Re: difference going long on a leveraged etf and short on its inverse?

Post by leenaerts » Thu Nov 08, 2018 3:58 am

grabiner wrote:
Wed Nov 07, 2018 10:20 pm
leenaerts wrote:
Wed Nov 07, 2018 10:01 am
What would be the difference with going long on e.g. SSO and going short on SDS? Should they give me the same returns? If not what is the difference?
The daily returns will be the same, but your exposure will change, so that the multi-day returns will be different.

If you put $1000 into a long 2x leveraged fund, and the market rises by 5%, you now have $1100 in this fund, so your stock-market exposure increased to $2200.

If you short $1000 in a short 2x leveraged fund, and the market rises by 5%, your short position is now $900, so your stock-market exposure decreased to $1800.

Thus, unless you adjust your position, you won't get the same two-day returns.
dont really get it. If my daily change will be the same and if I start with the same amount in both of my options i should end the day with the same amount in these 2 options too no? Which will be the start for the next day etc? Why will it be different ?
If the market rises by 5% the Inverse of the market should lose 5% which should make my short position in the inverse go to 1100 with an exposure of 2200 ?

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BeBH65
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Re: difference going long on a leveraged etf and short on its inverse?

Post by BeBH65 » Thu Nov 08, 2018 4:49 am

read the wiki mentioned above
read the previous threads on inverse and leveraged funds

the daily tracking-error will be compounded daily
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

leenaerts
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Re: difference going long on a leveraged etf and short on its inverse?

Post by leenaerts » Thu Nov 08, 2018 5:14 am

BeBH65 wrote:
Thu Nov 08, 2018 4:49 am
read the wiki mentioned above
read the previous threads on inverse and leveraged funds

the daily tracking-error will be compounded daily
Site doesnt answer my question.
And average return is still 3x s and p after expense ratio. I'm not caring too much about that decay, I know what it is. It makes it a bit more volatile but that's about it.

Am I correct there is no difference except for expense ratios for the options I mentioned ?

Momus
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Re: difference going long on a leveraged etf and short on its inverse?

Post by Momus » Thu Nov 08, 2018 5:21 am

leenaerts wrote:
Thu Nov 08, 2018 5:14 am
BeBH65 wrote:
Thu Nov 08, 2018 4:49 am
read the wiki mentioned above
read the previous threads on inverse and leveraged funds

the daily tracking-error will be compounded daily
Site doesnt answer my question.
And average return is still 3x s and p after expense ratio. I'm not caring too much about that decay, I know what it is. It makes it a bit more volatile but that's about it.

Am I correct there is no difference except for expense ratios for the options I mentioned ?
You will lose a ton of money if the leverage etf move up and down trading side ways for sometime. It only make money if you can guess the correct direction and that direction goes your way without many ups and downs. Ask me how I know...

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BeBH65
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Re: difference going long on a leveraged etf and short on its inverse?

Post by BeBH65 » Thu Nov 08, 2018 10:23 am

leenaerts wrote:
Thu Nov 08, 2018 5:14 am
BeBH65 wrote:
Thu Nov 08, 2018 4:49 am
read the wiki mentioned above
read the previous threads on inverse and leveraged funds

the daily tracking-error will be compounded daily
Site doesnt answer my question.
From the Wiki:
Image
It is better to invest 100% in the blue fund, aboveccombining the yellow and orange funds.
Will it not be the same for your funds? - try to graph them over the period shown above. If both end above the blue line then you win.
Please post your result here.
Last edited by BeBH65 on Thu Nov 08, 2018 11:15 am, edited 1 time in total.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

MotoTrojan
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Re: difference going long on a leveraged etf and short on its inverse?

Post by MotoTrojan » Thu Nov 08, 2018 10:27 am

Also you are not getting the expense ratio paid to you so no shorting a high ER fund isn’t helping. Whoever holds the share is paying that ER.

leenaerts
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Re: difference going long on a leveraged etf and short on its inverse?

Post by leenaerts » Thu Nov 08, 2018 3:58 pm

MotoTrojan wrote:
Thu Nov 08, 2018 10:27 am
Also you are not getting the expense ratio paid to you so no shorting a high ER fund isn’t helping. Whoever holds the share is paying that ER.
An inverse s and p leveraged fund. With a high ER of 2% I assume it will just be 2% lower in price after a year. Since I'm shorting that stock I can buy it back 2% cheaper when i close my position. What am i not seeing ?

MotoTrojan
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Re: difference going long on a leveraged etf and short on its inverse?

Post by MotoTrojan » Thu Nov 08, 2018 4:45 pm

leenaerts wrote:
Thu Nov 08, 2018 3:58 pm
MotoTrojan wrote:
Thu Nov 08, 2018 10:27 am
Also you are not getting the expense ratio paid to you so no shorting a high ER fund isn’t helping. Whoever holds the share is paying that ER.
An inverse s and p leveraged fund. With a high ER of 2% I assume it will just be 2% lower in price after a year. Since I'm shorting that stock I can buy it back 2% cheaper when i close my position. What am i not seeing ?
I stand corrected. What would your borrowing cost be though?

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grabiner
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Re: difference going long on a leveraged etf and short on its inverse?

Post by grabiner » Thu Nov 08, 2018 9:29 pm

leenaerts wrote:
Thu Nov 08, 2018 3:58 am
grabiner wrote:
Wed Nov 07, 2018 10:20 pm
leenaerts wrote:
Wed Nov 07, 2018 10:01 am
What would be the difference with going long on e.g. SSO and going short on SDS? Should they give me the same returns? If not what is the difference?
The daily returns will be the same, but your exposure will change, so that the multi-day returns will be different.

If you put $1000 into a long 2x leveraged fund, and the market rises by 5%, you now have $1100 in this fund, so your stock-market exposure increased to $2200.

If you short $1000 in a short 2x leveraged fund, and the market rises by 5%, your short position is now $900, so your stock-market exposure decreased to $1800.

Thus, unless you adjust your position, you won't get the same two-day returns.
dont really get it. If my daily change will be the same and if I start with the same amount in both of my options i should end the day with the same amount in these 2 options too no? Which will be the start for the next day etc? Why will it be different ?
In the first example, you have $1100 in the ETF you are long.

In the second example, you have $2000 in cash and -$900 in the ETF you are short.

These two positions are no longer equivalent, even though they have the same dollar value. For example, if the market falls 5% the next day, the first position will lose $110, while the second position will lose $90.
Wiki David Grabiner

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