Leveraged ETF's

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Topic Author
krb
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Leveraged ETF's

Post by krb » Mon Dec 02, 2019 11:11 am

Hi everyone.

I may or may not have heard of these before they were brought up recently. I read the wiki that is pretty anti. I get that these are not "extra concentrated" SP500 funds or what have you and that they use complex (to me) financial instruments to try to get 2X or 3X whatever the market delivers, whether up or down. I get that they do not track the index long term either, but rather only try to get 2X or 3X the end of the day every day.

Here's my question: I know no one advocates holding these for long term. That's another question. My question is - if the value goes to zero that's a risk we all take with all our investments, even "safe" investments like bonds. My question is - is there any risk of a cash call, meaning, if one bought a few thousand dollars just to see what happens, is there any chance you could be on the hook for thousands of dollars more if the market crashes? I tried to email the company but it looks like that is not possible.

I looked at a prospectus and it really doesn't address this. I'm inclined to think that risk does not exist but thought to ask the people here.

Thank you in advance!

MotoTrojan
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Re: Leveraged ETF's

Post by MotoTrojan » Mon Dec 02, 2019 12:15 pm

krb wrote:
Mon Dec 02, 2019 11:11 am
Hi everyone.

I may or may not have heard of these before they were brought up recently. I read the wiki that is pretty anti. I get that these are not "extra concentrated" SP500 funds or what have you and that they use complex (to me) financial instruments to try to get 2X or 3X whatever the market delivers, whether up or down. I get that they do not track the index long term either, but rather only try to get 2X or 3X the end of the day every day.

Here's my question: I know no one advocates holding these for long term. That's another question. My question is - if the value goes to zero that's a risk we all take with all our investments, even "safe" investments like bonds. My question is - is there any risk of a cash call, meaning, if one bought a few thousand dollars just to see what happens, is there any chance you could be on the hook for thousands of dollars more if the market crashes? I tried to email the company but it looks like that is not possible.

I looked at a prospectus and it really doesn't address this. I'm inclined to think that risk does not exist but thought to ask the people here.

Thank you in advance!
If you were to buy a few thousand dollars just to see what happens, I would suggest using something more in line with this portfolio:

viewtopic.php?f=10&t=272007

No, as an ETF you are only on the hook for the dollar amount you put in to them. Another advantage of an ETF is that if the fund provider goes bust you still own the underlying assets.

HEDGEFUNDIE
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Re: Leveraged ETF's

Post by HEDGEFUNDIE » Mon Dec 02, 2019 12:18 pm

You can only lose what you put in, not more.

not4me
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Re: Leveraged ETF's

Post by not4me » Mon Dec 02, 2019 1:18 pm

MotoTrojan wrote:
Mon Dec 02, 2019 12:15 pm
Another advantage of an ETF is that if the fund provider goes bust you still own the underlying assets.
OP, just to expand on this point...I know sometimes terms can be used loosely & if you aren't familiar you may not realize when important. if you should be considering a "ETN", that is different from MotoTrojan's point (which is on topic...I'm the one slightly veering off topic). In other threads, I've seen that distinction get lost on occasion.

MotoTrojan
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Re: Leveraged ETF's

Post by MotoTrojan » Mon Dec 02, 2019 1:31 pm

not4me wrote:
Mon Dec 02, 2019 1:18 pm
MotoTrojan wrote:
Mon Dec 02, 2019 12:15 pm
Another advantage of an ETF is that if the fund provider goes bust you still own the underlying assets.
OP, just to expand on this point...I know sometimes terms can be used loosely & if you aren't familiar you may not realize when important. if you should be considering a "ETN", that is different from MotoTrojan's point (which is on topic...I'm the one slightly veering off topic). In other threads, I've seen that distinction get lost on occasion.
Thank you, I should've mentioned that. For example the VIX based trading mechanisms that went bust not that long ago were ETN's, which are far riskier than an ETF.

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Tyler Aspect
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Re: Leveraged ETF's

Post by Tyler Aspect » Mon Dec 02, 2019 2:12 pm

ProShares Ultra S&P 500 were down 81% during the last recession. These are very volatile funds.

The 3X leveraged ETFs were started after the last recession, so their history is a bit too short.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

MotoTrojan
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Re: Leveraged ETF's

Post by MotoTrojan » Mon Dec 02, 2019 2:32 pm

Tyler Aspect wrote:
Mon Dec 02, 2019 2:12 pm
ProShares Ultra S&P 500 were down 81% during the last recession. These are very volatile funds.

The 3X leveraged ETFs were started after the last recession, so their history is a bit too short.
We live in the age of data, and daily S&P500 returns and borrowing costs are readily available. You don't think performance from 2007 onward (let alone back to the 1980's) can be estimated with high precision?

UPRO would've had a 97-98% monthly return drawdown FWIW.

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Stef
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Re: Leveraged ETF's

Post by Stef » Mon Dec 02, 2019 3:21 pm

It's not like LETFs would kill your portfolio in a worst case scenario. 10k invested in October 2007 (peak before the financial crisis):

Image
Portfolio 1: SPY
Portfolio 2: SSO

Topic Author
krb
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Re: Leveraged ETF's

Post by krb » Mon Dec 02, 2019 3:22 pm

not4me wrote:
Mon Dec 02, 2019 1:18 pm
MotoTrojan wrote:
Mon Dec 02, 2019 12:15 pm
Another advantage of an ETF is that if the fund provider goes bust you still own the underlying assets.
OP, just to expand on this point...I know sometimes terms can be used loosely & if you aren't familiar you may not realize when important. if you should be considering a "ETN", that is different from MotoTrojan's point (which is on topic...I'm the one slightly veering off topic). In other threads, I've seen that distinction get lost on occasion.
Hi and thank you. I recognize this is gambling money (!) not investing money. I'm just thinking... why not throw $1000 into it and leave it for ten years? Yes I recognize it is not investing but gambling. I don't really like Las Vegas. I would consider it the same as taking a weekend there and playing blackjack...

Topic Author
krb
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Re: Leveraged ETF's

Post by krb » Mon Dec 02, 2019 3:23 pm

not4me wrote:
Mon Dec 02, 2019 1:18 pm
MotoTrojan wrote:
Mon Dec 02, 2019 12:15 pm
Another advantage of an ETF is that if the fund provider goes bust you still own the underlying assets.
OP, just to expand on this point...I know sometimes terms can be used loosely & if you aren't familiar you may not realize when important. if you should be considering a "ETN", that is different from MotoTrojan's point (which is on topic...I'm the one slightly veering off topic). In other threads, I've seen that distinction get lost on occasion.
Hi. What is an ETN? I just want to make sure if it goes bust, I am not on the hook for any more money that what I paid in.

Topic Author
krb
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Re: Leveraged ETF's

Post by krb » Mon Dec 02, 2019 3:48 pm

Hedgefundie's adventures are pretty amazing. Interesting gamble... And fun to follow.

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Stef
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Re: Leveraged ETF's

Post by Stef » Mon Dec 02, 2019 3:55 pm

I wouldn't call it gamble. It's well thought out. Index investing with more risk.

Topic Author
krb
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Re: Leveraged ETF's

Post by krb » Mon Dec 02, 2019 4:42 pm

Stef wrote:
Mon Dec 02, 2019 3:55 pm
I wouldn't call it gamble. It's well thought out. Index investing with more risk.
True ... but if it's 3X leveraged and the market goes down 33% in one day I would think the account is wiped out. I was thinking gambling in termos of only buying the 3X. In terms of HIS strategy Hopefully the balancing fund goes up so you can rebalance. So less risky for him but pretty much gambling as to what I was thinking (buy only the leveraged fund with no hedge).

It's a neat read though. Very interesting.

pepys
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Re: Leveraged ETF's

Post by pepys » Mon Dec 02, 2019 8:18 pm

krb wrote:
Mon Dec 02, 2019 4:42 pm
Stef wrote:
Mon Dec 02, 2019 3:55 pm
I wouldn't call it gamble. It's well thought out. Index investing with more risk.
True ... but if it's 3X leveraged and the market goes down 33% in one day I would think the account is wiped out. I was thinking gambling in termos of only buying the 3X. In terms of HIS strategy Hopefully the balancing fund goes up so you can rebalance. So less risky for him but pretty much gambling as to what I was thinking (buy only the leveraged fund with no hedge).

It's a neat read though. Very interesting.
I think there was some discussion in the main HEDGEFUNDIE thread on that. Circuit breakers set the max loss in a day at 20%, so the max loss should be 60% for UPRO. And even before they were put into place in 1987, we never had a day nearly that bad. But I agree with your main point. UPRO could realistically go down 99% without rebalancing.

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Tyler Aspect
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Re: Leveraged ETF's

Post by Tyler Aspect » Thu Dec 05, 2019 4:38 pm

pepys wrote:
Mon Dec 02, 2019 8:18 pm
krb wrote:
Mon Dec 02, 2019 4:42 pm
Stef wrote:
Mon Dec 02, 2019 3:55 pm
I wouldn't call it gamble. It's well thought out. Index investing with more risk.
True ... but if it's 3X leveraged and the market goes down 33% in one day I would think the account is wiped out. I was thinking gambling in termos of only buying the 3X. In terms of HIS strategy Hopefully the balancing fund goes up so you can rebalance. So less risky for him but pretty much gambling as to what I was thinking (buy only the leveraged fund with no hedge).

It's a neat read though. Very interesting.
I think there was some discussion in the main HEDGEFUNDIE thread on that. Circuit breakers set the max loss in a day at 20%, so the max loss should be 60% for UPRO. And even before they were put into place in 1987, we never had a day nearly that bad. But I agree with your main point. UPRO could realistically go down 99% without rebalancing.
My understanding of the circuit breaker is that if the opening bell loss was already greater than the circuit breaker limit, then it becomes possible for the daily loss to be greater than the circuit breaker.

Leveraged ETFs are subject to volatility decay, that large daily price movements are not friendly toward leveraged ETFs. Leveraged ETFs prefer daily price movements to be small.

The derivatives employed by the leveraged ETFs may not track a target index well in distressed economic situations. Weren't the use of synthetic puts implicated in the 1987 crash?
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

HEDGEFUNDIE
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Re: Leveraged ETF's

Post by HEDGEFUNDIE » Thu Dec 05, 2019 4:58 pm

Tyler Aspect wrote:
Thu Dec 05, 2019 4:38 pm
pepys wrote:
Mon Dec 02, 2019 8:18 pm
krb wrote:
Mon Dec 02, 2019 4:42 pm
Stef wrote:
Mon Dec 02, 2019 3:55 pm
I wouldn't call it gamble. It's well thought out. Index investing with more risk.
True ... but if it's 3X leveraged and the market goes down 33% in one day I would think the account is wiped out. I was thinking gambling in termos of only buying the 3X. In terms of HIS strategy Hopefully the balancing fund goes up so you can rebalance. So less risky for him but pretty much gambling as to what I was thinking (buy only the leveraged fund with no hedge).

It's a neat read though. Very interesting.
I think there was some discussion in the main HEDGEFUNDIE thread on that. Circuit breakers set the max loss in a day at 20%, so the max loss should be 60% for UPRO. And even before they were put into place in 1987, we never had a day nearly that bad. But I agree with your main point. UPRO could realistically go down 99% without rebalancing.
My understanding of the circuit breaker is that if the opening bell loss was already greater than the circuit breaker limit, then it becomes possible for the daily loss to be greater than the circuit breaker.

Leveraged ETFs are subject to volatility decay, that large daily price movements are not friendly toward leveraged ETFs. Leveraged ETFs prefer daily price movements to be small.

The derivatives employed by the leveraged ETFs may not track a target index well in distressed economic situations. Weren't the use of synthetic puts implicated in the 1987 crash?
Swaps track their indexes perfectly. Whether or not the counterparties are solvent enough to pay out is the only question.

fallingeggs
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Re: Leveraged ETF's

Post by fallingeggs » Fri Dec 06, 2019 3:15 pm

A 34% loss in a single trading session is neigh impossible to imagine. Notwithstanding the circuit breakers, it would take a catastrophic event (direct attack on DC by China or Russia?) and if you plan your savings around catastrophic events . . .

I am slightly more concerned with the market making mechanisms of leveraged ETFs breakdowning during times of extreme panic and volume. What happens if the authorized participants can't handle the volume and exists the market? Don't have an answer, but I do know that Jan 2018 gave us a hint as to how these leveraged ETFs might behave in such times. And they did just fine.

Or... I think the last time I looked, UPRO spread this risk among 6 or so global banks. What happens if one fails? If the ETF has $12b under management and the solvent banks are only willing to take risk up to $10b, what happens to the other $2b (which will probably be tied up in the unwind period for weeks)? Perhaps it just sits in cash and the ETF goes down to like 2.7 daily leverage until the cash can be redeemed out? Hardly catastrophic.

Or... what happens if the ETF provider itself goes belly up at the bottom and leaves you with the huge leveraged loss, but no investment vehicle for the post-crash gains? That's why I developed a futures trading contingency plan that I can set in motion in short order (ie, I'm cleared for futures trading at my broker and have already played around with the trading platform so I know how it practically works).

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