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Video: WSJ on 2X ETFs – “Steer Clear”

January 6, 2009 10:30 pm

The Wall Street Journal is now in the action with their comments on double leveraged ETFs. This is a cursory look at the issue that is getting some attention, but it fell short of providing any usable information.

SEE – TDI Episode 90: The Everything ETF Episode (Part 1)

Clearly, we were in a time of wicked volatility and the swaps got crushed once the market turned since the volatility factor was eroded. I am not sure why the fellow on the left is so animated and needs to say “steer clear” as that is not at all what the gent on the right seemed to be saying. Was it?

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Written by Andrew Horowitz · Category(s) Markets, Stocks    |  Tags: • •   

15 Responses to “Video: WSJ on 2X ETFs – “Steer Clear””

  1. Mark on January 7th, 2009 4:30 am

    I agree, Tom did not say steer clear…he simply expressed that you should know what you are getting into. There is no fine print. If you go to the PowerShares site and look up the leveraged ETFs they don’t hide anything. This is just another example of why people should understand what they are investing in and how it actually works. If there is little to no transparency or you don’t understand it, then don’t invest in it. If only the Madoff investors followed this advice.

  2. Garth on January 7th, 2009 9:18 am

    Agreed – that was a very poor paraphrase to close the piece.

    I’m curious to hear about the “complex math” that leads to some of the discrepancies between 2x short and long ETF returns over the long term that Andrew has alluded to on his show. Some of us are math friendly and would love an explanation. Anyone know where I can find one? Thanks!

  3. Mark on January 7th, 2009 9:27 am

    As I mentioned in my comment, Proshares hides nothing:
    http://www.proshares.com/funds/performance/Unders…

  4. Garth on January 7th, 2009 9:32 am

    Great. Thanks Mark.

  5. VPro on January 8th, 2009 1:00 am

    This was absolutely useless. Why didn't they name the ETF? Why not show a chart instead of photos of sad Wall St. workers? Simon Constable (on the eft) is a member of the street.com team as well and is not a reliable source as this proves.

  6. Mark on January 8th, 2009 1:33 am

    I'm confused…why would they need to name the ETF? My understanding is that the same problem exists for all leveraged ETFs. Let me simplify why volatility keeps a 2x ETF from being 2x for more than one day. Let's assume the index is at 100 at day zero. For simplicity sake, lets assume that the index went up 10% the first day and down 10% the next day. That would leave the index at 110 and the 2x ETF at 120 after day one. The next day would leave the index at 99 and the 2x ETF at 96. Let's assume the timing of returns was reversed. Day one, index =90 2x=80 and day two index =99 2x=96. Also, if volatility is lower then the difference is less and vice-versa.

    My understanding is that the volatility described above is not everything, but I can't speak to other areas of concern that I've been told to watch out for when understanding differences between the index and 1x or 2x of the index.:
    financing rates associated with leverage;
    other fund expenses;
    dividends paid by companies in the index

    I hope this helps

    -Mark

  7. VPro on January 8th, 2009 1:59 am

    Mark,
    As you mentioned, Simon said the guy on the right said "steer clear", but the guy never said that. That's bad journalism, they weren't on the same page.

    I've traded many 2:1 ETFs [DIG, DUG, UCO, SMN, DDM, DXD, SSO, SDS, QLD, QID, UYG, SKF] so I know how they work. But since they were attempting to educate people, showing a comparison chart of the SSO and the S&P of the time frame and the price discrepancy they were referencing would have been much more relevant and educational for people than showing the photos of glum pit workers.

  8. Mark on January 8th, 2009 2:26 am

    Why would they sensationalize the story? To attract more readers of course! I used to work for the same company for 8+ years (Dow Jones). While the journalists there have a great deal of integrity, there is definitely some need to say things that attract viewers. Unfortunately, think how many people saw the same video and all they heard was "stay clear." Yes, it gets more attention but is that a service to the reader?

  9. EricF. on January 8th, 2009 4:12 am

    Thanks, this page is an excellent explanation.

  10. EricF. on January 8th, 2009 4:15 am

    Arguably, for a large portion of the audience the "steer clear" message is a good summary. Only for people willing to study how the leverage ETFs work and understand the consequences, which I would guess is less than 10% of the audience, does the message not apply.

  11. Andrew Horowitz on January 8th, 2009 12:25 pm

    Re: Mark commented on Video: WSJ on 2X ETFs – “Steer Clear” –

    Somehow, the assumption, while correct, misses the point. The use of the 2X is best as a short term trend. Use the math to assume a straight line up or down, and then with several days up, one down etc.

    As a short term hedge, it works…. ( as long as there is a high correlation to index)

    BTW, any possibility that Mutual Fund companies are doing a BIG PR job here? They are the same thay have told us that “time in and not timing” and “there has never been a 20 year negative period” and my favorite “ if you miss the biggest 5 days of the market over the years….”

    Thought on the potential PR Spin– Figures never lie, but liars always figure….—

    Andrew

  12. VPro on January 9th, 2009 2:06 am

    Guys, these are short term trading vehicles not buy and hold long term investments. So while looking at a 1 year chart one may produce a big return or loss, by moving in and out using TA one can do well. I find them to be excellent trading vehicles. I believe that getting educated is better than being afraid to act.

  13. Andrew Horowitz on January 9th, 2009 2:24 am

    Re: steven commented on Video: WSJ on 2X ETFs – “Steer Clear” –

    Agreed. These should be used a short term hedges and trading vehicles. BUT, the main issue is the oscillation. Full force in any any direction is massively profitable if the right ETF used.

    Andrew

  14. Andrew Horowitz on January 8th, 2009 10:24 pm

    Re: VPro commented on Video: WSJ on 2X ETFs – “Steer Clear” — EXACTLY! Andrew

  15. steven on January 9th, 2009 12:48 pm

    Just look at the 2008 YTD performance of skf vs xlf and uyg vs xlf , this should show everyone to be wary of what they are trying to accomplish. UYG was down over 50% for the year and skf was unchanged. This is not due to costs or dividends but simply due to the fact that the etf's provide a bet on the "daily" return (arithmetic return) which varies widely based on volatility verse the geometric return which measures the asset from one point to another, for example the value from jan 1, 2008 to dec 31, 2008. Given the liquidity of these etf's, they have to be the most misunderstood investment vehicle of all time and virtually no one speaks about them other then to point out big moves in them on a given single day….simply amazing

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