Just thinking about this logically, not too in depth right now. Anyone see any huge problem with this? With further out contracts so much higher, even if oil traded at $100 xx time from now, the ETF’s could be flat. Along with that, simple math puts the levered long ETF at a disadvantage in the long run. Would like to hear your thoughts on this, and again, I left the idea pretty broad.
yes, you can not borrow the leveraged ETF.
also, these leveraged etfs are getting bad press due to the volatility in the markets, if (when markets stabilize) and the tracking asset rises/falls in subsequent fashion think (2005) then these leveraged ETF’s would perform on a monthly/yearly basis completely different then they are now…
I’ve thought about this too and in theory it makes sense. However, the spread on the actual returns doesn’t seem to be as consistent as the math would suggest. I’m not sure why… tracking error I guess.
Oh, you can’t borrow the levered ETF… that would cause a problem.
bchadwick Wrote: ------------------------------------------------------- > Oh, you can’t borrow the levered ETF… that would > cause a problem. well… when i looked at shorting them they were negative rebates, but we had really good relationship with PBs… now they would laugh at me even in small retail size.
Are you trying to do some kind of contango trade with 2 ETFs? That won’t work.
malnoll Wrote: ------------------------------------------------------- > Just thinking about this logically, not too in > depth right now. Anyone see any huge problem with > this? With further out contracts so much higher, > even if oil traded at $100 xx time from now, the > ETF’s could be flat. Along with that, simple math > puts the levered long ETF at a disadvantage in the > long run. Would like to hear your thoughts on > this, and again, I left the idea pretty broad. Im gonna get hammered in level 3 because I dont understand this strategy. Anyone care to explain?
I had thought about the current market not being “normal” as a problem. Didn’t know they weren’t borrowable, but probably wouldn’t if they were. Too much invested strictly on math and prob. for me. Thanks though.
Returns on the two will be asymetrical, regardless of contango, and more so over time. If you bet oil going up, this would be a bad trade. Just my opinion.
ConvertArb Wrote: ------------------------------------------------------- > yes, you can not borrow the leveraged ETF. You can short leveraged ETFs. Not sure if you can short every one of them, but most are shortable depending on your brokerage.
bchadwick Wrote: ------------------------------------------------------- > I’ve thought about this too and in theory it makes > sense. However, the spread on the actual returns > doesn’t seem to be as consistent as the math would > suggest. I’m not sure why… tracking error I > guess. I think the 2 main problem are that: 1. these funds have a negative roll yield whilst a contango is present and 2. these leveraged funds actually produce a geometric rather than an arithmetic return -They produce a multiple of the daily percentage return. So oil could go from $40 to $80, and you’d expect a 3x leveraged fund to produce a 300% return - but if it got there in a particularly volatile way, you could even actually end up being down overall. So if oil went from $40 to $30 on day one, your $100 etf would be worth $25. If it then went back to $40, it would be worth about $44. If oil went to $80, then it would be worth $132 - so your expected 300% return was actually only 65%.
chrismaths Wrote: > > I think the 2 main problem are that: > > 1. these funds have a negative roll yield whilst a > contango is present and > 2. these leveraged funds actually produce a > geometric rather than an arithmetic return -They > produce a multiple of the daily percentage > return. > > So oil could go from $40 to $80, and you’d expect > a 3x leveraged fund to produce a 300% return - but > if it got there in a particularly volatile way, > you could even actually end up being down > overall. > > So if oil went from $40 to $30 on day one, your > $100 etf would be worth $25. If it then went back > to $40, it would be worth about $44. If oil went > to $80, then it would be worth $132 - so your > expected 300% return was actually only 65%. I like your thoughts.
Oil ETFs also get smacked by discontango, or whatever the name for a flattening oil curve is, when they buy forward month contracts. I’ve seen that happen to USO lately when front month oil was up but the ETF was down.