Friday, February 13, 2009

More on the dangers of leveraged ETFs

This wasn't supposed to be the topic of today's blog but in doing research that will now appear in Monday's edition I stumbled upon a very interesting video on Morningstar that backs up my observations made in Tuesday's blog concerning the dangers of leveraged ETFs. If you've never heard of Morningstar, they're the guys who do the mutual and ETF fund ratings. They have an excellent (and addicting) site that I don't visit often enough but when I do, I usually spend far too much time.

To continue, at the bottom of one page was a link to one of their videos (shown in two short parts) entitled “Returns at these ETFs Could Shock You.” Intrigued by the dramatic title, I watched them both, and am glad I did for they expand upon Tuesday's blog and explain in detail about the dangers of leveraged funds—the double longs and the double shorts and employ graphics to show how that even a sideways fluctuation in the market (due to extreme volatility) can produce significant losses on both the long and short sides.

In doing their research, they said these leveraged ETFs perform as stated in their prospectuses. Performances over one day mirror +2x/-2x that of the indices they track.

Their recommendations were that if you can't monitor nor afford to trade these ETFs on a daily basis, you'll most likely not be happy with your returns. My take is to look at the historical charts and compare them their underlying indices or comparable funds. If there's a divergence, stay away, and do make sure that the fund has a long enough track record—at least a year as well as over a period of abnormal volatility (like now).

I'm thankful for this diversion because the article I had intended for today wasn't nearly as cheery nor as easy to research as I thought. And I wouldn't want any of my readers to be bummed out over Valentine's Day.

Here's last year's Valentine image sent out from Bernie Made-Off. Have a lovely one!

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