ETF portfolio strategy; investors should avoid 4X leveraged ETF’S

 

 ETF portfolio

4X ETF’s; the perfect con for the unsuspecting masses

These weapons of wealth destruction should not be part of your ETF portfolio strategy unless you have a very high threshold for pain and losses.  2X  leveraged plays could have room in your etf portfolio strategy and if one is using one’s profits, perhaps a small amount could be allocated to 3X ETF’s, but 4X ETF’s should be avoided like the plague.    Before we continue, it is recommended that you read this article on effective portfolio management. Without effective ETF portfolio management, losses are all that will await you over the long run.

The Securities and Exchange Commission on Tuesday approved a request to trade quadruple-leveraged exchange-traded funds, marking a first for the growing market for such products in the United States.

One of the funds is designed to deliver, 400 per cent of the daily performance of S&P 500 stock index futures, while another fund will aim to deliver four times the inverse of that benchmark. That means a fund could go up 8 per cent on a day the index it tracks falls by 2 per cent.

 

when experts are excited the masses should be nervous

“We’re excited about it,” said Sam Masucci, chief executive officer at Exchange Traded Managers Group LLC, which is distributing the product, though he said the product is “not going to be for everybody.”But for those people that are looking for the leveraged exposure to the S&P and they’re not looking to do it by way of a futures product here you have a publicly listed security,” Masucci said.

In March, the agency ruled against an application by investors Cameron and Tyler Winklevoss to bring the first Bitcoin ETF to market, although the SEC recently said it would review that decision. Full Story

New forms of leverage usually occur close to market tops

Everything is slowly falling into play for the feeding frenzy stage which will eventually mark the top of this bull market. Such funds are only created to lure the masses in;  the idea is to create the illusion that one  can make money quickly and easily over a very short period. This development also informs us that the next correction will most likely prove to be a buying opportunity and will pave the way eventually to a top in this market. However, we suspect that the markets will most likely run to heights that will appear insane by today’s standards. Time will tell, but for now, the data indicates that a crash is not in the works.

Leveraged ETF’s Should not be Part of Your ETF Portfolio Strategy

While the masses fixate on the benefits of leveraged ETF’s, the dangers significantly outweigh the benefits as for the most parts those investing in these instruments are the ones that should be avoiding them.  The average investors know nothing about investing and now he/she is being conned into employing these instruments of destruction that offer the promise of huge returns but will most likely strip them of the very little they have.  The articles below provide further insights into why one should think twice before employing these leveraged instruments.

The problem

leverage is a double-edged sword! The annual standard deviation of the SPY is 10%, while for the SPXL, it’s 30%. If you slept through statistics class, no worries. That simply means you could lose 30% of your money in SPXL, even in a typical correction, in any given year. It wouldn’t even take an outlying event.

Then there’s the massive pricing problem these ETFs face. Let me give you an example of something that really happened to me – when oil prices fell from $114 to $26 in 2015-2016. The decline was nasty, about 77%. But the plunge in the price of the accompanying triple leveraged ETF was worse. The VelocityShares 3x Long Crude Oil ETN (UWTI, Rated “D-”) fell below a paltry dollar per share.

The sponsor subsequently pushed through a reverse stock split to prop up the per-share price, and the ETF’s ticker symbol was changed to UWTIF. But the end result of the oil price collapse and the use of leverage was simple: If you had bought just one, single share at a split-adjusted price of around $4,000, you’d have just $21 to show for it today!  Full Story

Investors should steer clear of leveraged ETFs

Leveraged products are power tools. The traders I talk with are looking at charts and analytics for entry and exit points and they are on top of the trade minute-by-minute. They use leveraged funds leverage to squeeze more out of small, quick moves.

If you’re playing a hunch with a leveraged ETF rather than trading a strategy based on strategic analysis, you’re the dumb money at the table. The problem at that point isn’t with the leveraged or inverse ETF, it’s with you.

I’m not sure regulators should protect investors from their own stupidity. The argument against approving the new ETFs and expanding leverage, therefore, shouldn’t come from folks who have never traded them, but from people with skin in the game

Most people, Bishop noted, won’t use the new products the way he does. “They’ll buy and hold them for way too long. These 4x products, if approved, are going to cause a lot of unsuspecting people a lot of pain. Full Story

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