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Please see attached images. Chart 1 is a percentage gain/loss chart that shows the DOW 30 index (the solid red part) and two leveraged ETFs that track it. DDM tries to move 2X as much as the DOW on each day, while DXD tries to move 2X in the opposite direct as the DOW on each day.
But as you can see, although the DOW overall was up 1% or so over the time period, BOTH DXD and DDM were DOWN. DDM was down 5% and DXD was down 21%. So buying both of these at the same time would have lost you money rather than having you come out even. I've been saying for a while that holding leveraged ETFs (being long either long OR short leveraged ETFs) over a long period of time is a losing proposition, which is why I only trade them intraday.
So what about selling both of them SHORT in equal dollar amounts? Well, you would have made money on that. And furthermore your risk is pretty low. On a day by day basis, you're unlikely to fall into a margin call because each ETF balances the other out more or less. It's over time, and due to simple mathematics, that leveraged ETFs are bound to fall flat. Even in the event one side is UP, the other side is going to be DOWN by a greater percentage over any length of time.
Look at Chart 2. This is a price chart for ERX and ERY -- these are 3X leveraged ETFs that follow the oil and gas index. One went from $67 to $42, the other went from $47 to $37. They both declined over time. It's the nature of the long-term movements of leveraged ETFs that are trying to peg one day movements. You would have made around 40% in a month's time just by shorting both sides.
You can even see this in one day increments. Look at the Quotes image. DIG and DUG were both down on the same day -- these are 2X ETFs that follow the oil and gas index. FAS and FAZ were both down on the same day -- these are 3X ETFs that follow the financials.
I've looked at a number of different pairs of ETFs over a variety of time periods over the past twelve months. There doesn't seem to be any permutation which doesn't make money with this strategy. The 3X ETFs alone can move 30% or more in one day -- but the risk is high and you have to be very aggressive with your stops. Shorting both sides, however, seems to be surprisingly low risk. It doesn't matter if the market goes up over time or goes down over time. Returns of 5-10%/month for 2X and 15%/month for 3X seem likely.
Interesting idea. I briefly looked at charts for a couple 2x ultras, and while it does appear to work more often than not, I did find some extended periods where you'd have a loss. Perhaps the 3x ultras would work better, but there's not enough data to analyze those yet. I'm going to look at this more closely when I have some time.
Please see attached images. Chart 1 is a percentage gain/loss chart that shows the DOW 30 index (the solid red part) and two leveraged ETFs that track it. DDM tries to move 2X as much as the DOW on each day, while DXD tries to move 2X in the opposite direct as the DOW on each day.
But as you can see, although the DOW overall was up 1% or so over the time period, BOTH DXD and DDM were DOWN. DDM was down 5% and DXD was down 21%. So buying both of these at the same time would have lost you money rather than having you come out even. I've been saying for a while that holding leveraged ETFs (being long either long OR short leveraged ETFs) over a long period of time is a losing proposition, which is why I only trade them intraday.
So what about selling both of them SHORT in equal dollar amounts? Well, you would have made money on that. And furthermore your risk is pretty low. On a day by day basis, you're unlikely to fall into a margin call because each ETF balances the other out more or less. It's over time, and due to simple mathematics, that leveraged ETFs are bound to fall flat. Even in the event one side is UP, the other side is going to be DOWN by a greater percentage over any length of time.
Look at Chart 2. This is a price chart for ERX and ERY -- these are 3X leveraged ETFs that follow the oil and gas index. One went from $67 to $42, the other went from $47 to $37. They both declined over time. It's the nature of the long-term movements of leveraged ETFs that are trying to peg one day movements. You would have made around 40% in a month's time just by shorting both sides.
You can even see this in one day increments. Look at the Quotes image. DIG and DUG were both down on the same day -- these are 2X ETFs that follow the oil and gas index. FAS and FAZ were both down on the same day -- these are 3X ETFs that follow the financials.
I've looked at a number of different pairs of ETFs over a variety of time periods over the past twelve months. There doesn't seem to be any permutation which doesn't make money with this strategy. The 3X ETFs alone can move 30% or more in one day -- but the risk is high and you have to be very aggressive with your stops. Shorting both sides, however, seems to be surprisingly low risk. It doesn't matter if the market goes up over time or goes down over time. Returns of 5-10%/month for 2X and 15%/month for 3X seem likely.
What do you think?
Have you looked at your returns after factoring in trading costs? Shorting an inverse ETF is shorting a short. Doesn't this add another layer of costs when you'd get the same result by simply going long?
Have you looked at your returns after factoring in trading costs? Shorting an inverse ETF is shorting a short. Doesn't this add another layer of costs when you'd get the same result by simply going long?
The basic trick here is you're shorting something that is basically guaranteed to eventually fall short of its goal of 2X or 3X the index.
Consider someone who just for kicks bought the direct 2X and the inverse 2X for the same index. Over time, one position might be up and the other might be down, or they both might be down. But the *combined* investment will be DOWN (the one that's down will be down by a larger amount than the one that's up is up). They won't both be up, guaranteed.
Therefore, being a holder of both sides is always a losing proposition. So it figures that being a short seller of both sides would always be a winning proposition.
Shorting ONLY the short or ONLY the long might well put you in a monster margin call in one day (as I said, I've seen the 3Xs move over 30% in one day). You have to buy both sides to eliminate risk and eliminate margin call risk.
There would be little point in shorting a short NON-LEVERAGED ETF (or both sides of a NON-LEVERAGED pair) -- in that case you might as well just buy the long instead of shorting the short (don't even need margin for that). But because of how the leveraged ETFs work (or don't work) over time, this strategy can make money.
Commissions factor in to any trading strategy of course. Margin interest would also factor in to this particular strategy. For the ERX/ERY (chart 2):
Sell 47 shares of one at $67, sell 67 shares of the other at $47, pay $8 commission on both. Buy to close 47 shares of one at $42, buy to close 67 shares of the other at $37, pay $8 commission on both. Pay about $46 margin interest over the life of the positions. It's a 39.5% gain after commissions and interest or about a 29.4% gain after taxes (margin interest is not deductible). That's in one month.
Over the long term, I think this start to break down. Could't one of the ETF's exceed a 100% gain, but the other not? I dont see how both could. And this seems where you could get in trouble. Over time doesn't the compouding work differently for the two sides? If you buy both at 100 and one goes from 100 to 400, you cover that short at a 300 pt loss, but the other??? It can only thoretically move down a total of 100 pts.
For example, I see this effect with: DAG vs. AGA; UCO vs SCO
I hear what you are saying as far as the performance in general on these things, especially the very-high leveraged ones that are highly volatile -- the volaility drag impacts performance on both sides (the ETF and its inverse), so you would expect both to erode in value.
OK, can't say I know much about this specific topic. However, my gut tells me that once the big players realize someone is taking their lunch they will find a way to close the hole a prevent there from being a clearly visible +EV play out there.
Just like Vegas casinos changed the rules of blackjack when counting was found to work, and volatility smiles started occuring when Black-Scholes was found to be effective... this too will close.
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