One of the popular rages in the market today are the ultra leveraged ETF’s. They have them for almost every type of commodity and index and sector. Last November we informed our readers that coming onto the scene were 3x Ultra ETFs. We told our subscribers at that time to be weary of trading in such vehicles, as no one is yet certain of how they will perform versus the indices they are pegged against. So for the purposes of this posting, I thought it would be appropriate to see how valuable our warning was. Namely, lets dissect the (FAS) and (FAZ) ETF’s in trending and sideways markets as well as since inception, and comapre it to (XLF) the Long ETF in the Financials (not an Ultra!)
Here’s our first chart:
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height:15.75pt;width:299pt’>TRENDING MARKET</td>
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<td colspan=2 class=xl6716508 style=’border-left:none’>Close of 7/10/09</td>
<td colspan=2 class=xl6716508 style=’border-left:none’>Close of 7/27/09</td>
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<td class=xl6916508 style=’border-top:none;border-left:none’>Value</td>
<td class=xl6916508 style=’border-top:none;border-left:none’>Share$</td>
<td class=xl6916508 style=’border-top:none;border-left:none’>Value</td>
<td class=xl6916508 style=’border-top:none;border-left:none’>Share$</td>
<td class=xl7116508 style=’border-top:none;border-left:none’>Profits</td>
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<td height=20 class=xl7216508 style=’height:15.0pt;border-top:none’>XLF</td>
<td class=xl7316508 style=’border-top:none;border-left:none’>$5,000 </td>
<td class=xl7316508 style=’border-top:none;border-left:none’>$11 </td>
<td class=xl7316508 style=’border-top:none;border-left:none’>$5,685 </td>
<td class=xl7316508 style=’border-top:none;border-left:none’>$13 </td>
<td class=xl7716508 style=’border-top:none;border-left:none’>$685 </td>
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<td class=xl7316508 style=’border-top:none;border-left:none’>$5,000 </td>
<td class=xl7316508 style=’border-top:none;border-left:none’>$56 </td>
<td class=xl7316508 style=’border-top:none;border-left:none’>$3,288 </td>
<td class=xl7316508 style=’border-top:none;border-left:none’>$37 </td>
<td class=xl7816508 style=’border-top:none;border-left:none’>($1,712)</td>
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<td class=xl7316508 style=’border-top:none;border-left:none’>$37 </td>
<td class=xl7316508 style=’border-top:none;border-left:none’>$7,172 </td>
<td class=xl7316508 style=’border-top:none;border-left:none’>$54 </td>
<td class=xl7716508 style=’border-top:none;border-left:none’>$2,172 </td>
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border-left:none’>FAS and FAZ<span style=’mso-spacerun:yes’> </span>$
Difference</td>
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As you can see in a trending market FAZ lost you a little less than its 3:1 promise – good so far, and FAS made slightly more than its 3:1 promise. You could have essentially have gone long on both of these ETF’s and almost 5% on your investment. Note also, that this was the shortest time period that we measured.
Now the second chart:
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<td colspan=2 class=xl6725950 style=’border-left:none’>Close of 4/24/09</td>
<td colspan=2 class=xl6725950 style=’border-left:none’>Close of 7/10/09</td>
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<td class=xl7025950 style=’border-top:none;border-left:none’>Share$</td>
<td class=xl7025950 style=’border-top:none;border-left:none’>Value</td>
<td class=xl7025950 style=’border-top:none;border-left:none’>Share$</td>
<td class=xl7125950 style=’border-top:none;border-left:none’>Profits</td>
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<td class=xl7325950 style=’border-top:none;border-left:none’>$5,000 </td>
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<td class=xl7325950 style=’border-top:none;border-left:none’>$5,073 </td>
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<td class=xl7725950 style=’border-top:none;border-left:none’>$73 </td>
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<td class=xl7325950 style=’border-top:none;border-left:none’>$5,000 </td>
<td class=xl7325950 style=’border-top:none;border-left:none’>$83 </td>
<td class=xl7325950 style=’border-top:none;border-left:none’>$3,403 </td>
<td class=xl7325950 style=’border-top:none;border-left:none’>$56 </td>
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<td class=xl7325950 style=’border-top:none;border-left:none’>$42 </td>
<td class=xl7325950 style=’border-top:none;border-left:none’>$4,461 </td>
<td class=xl7325950 style=’border-top:none;border-left:none’>$37 </td>
<td class=xl7825950 style=’border-top:none;border-left:none’>($539)</td>
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Difference</td>
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Here we have a market that was trending sideways with no major gains at all in XLF (only 1.5%). But during that same time FAZ racked up losses of -31.9% and FAS racked up losses of -10.8%. So during that same time, the ratio for FAZ was more like a 21:1 leveraged ETF and FAS was a 7:1. Neither of which is the type of leverage you want to engage yourself in.
And finally, the last chart:
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<div id=”Book1_30761″ align=center x:publishsource=”Excel”>
<table border=0 cellpadding=0 cellspacing=0 width=399 style=’border-collapse:
collapse;table-layout:fixed;width:299pt’>
<col width=39 style=’mso-width-source:userset;mso-width-alt:1426;width:29pt’>
<col width=70 style=’mso-width-source:userset;mso-width-alt:2560;width:53pt’>
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<col width=68 style=’mso-width-source:userset;mso-width-alt:2486;width:51pt’>
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width:53pt’>
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<td colspan=6 height=21 class=xl6330761 width=399 style=’border-right:1.5pt solid #006600;
height:15.75pt;width:299pt’>SINCE INCEPTION</td>
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<td height=20 class=xl6630761 style=’height:15.0pt;border-top:none’> </td>
<td colspan=2 class=xl6730761 style=’border-left:none’>Close of 11/5/08</td>
<td colspan=2 class=xl6730761 style=’border-left:none’>Close of 7/27/09</td>
<td class=xl6830761 style=’border-top:none;border-left:none’> </td>
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<td height=20 class=xl6630761 style=’height:15.0pt;border-top:none’> </td>
<td class=xl6930761 style=’border-top:none;border-left:none’>Value</td>
<td class=xl6930761 style=’border-top:none;border-left:none’>Share$</td>
<td class=xl6930761 style=’border-top:none;border-left:none’>Value</td>
<td class=xl6930761 style=’border-top:none;border-left:none’>Share$</td>
<td class=xl7130761 style=’border-top:none;border-left:none’>Profits</td>
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<td height=20 class=xl7230761 style=’height:15.0pt;border-top:none’>XLF</td>
<td class=xl7330761 style=’border-top:none;border-left:none’>$5,000 </td>
<td class=xl7330761 style=’border-top:none;border-left:none’>$15 </td>
<td class=xl7330761 style=’border-top:none;border-left:none’>$4,252 </td>
<td class=xl7330761 style=’border-top:none;border-left:none’>$13 </td>
<td class=xl7730761 style=’border-top:none;border-left:none’>($748)</td>
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<td height=20 class=xl7230761 style=’height:15.0pt;border-top:none’>FAZ</td>
<td class=xl7330761 style=’border-top:none;border-left:none’>$5,000 </td>
<td class=xl7330761 style=’border-top:none;border-left:none’>$602 </td>
<td class=xl7330761 style=’border-top:none;border-left:none’>$308 </td>
<td class=xl7330761 style=’border-top:none;border-left:none’>$37 </td>
<td class=xl7730761 style=’border-top:none;border-left:none’>($4,692)</td>
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<td height=20 class=xl7230761 style=’height:15.0pt;border-top:none’>FAS</td>
<td class=xl7330761 style=’border-top:none;border-left:none’>$5,000 </td>
<td class=xl7330761 style=’border-top:none;border-left:none’>$277 </td>
<td class=xl7330761 style=’border-top:none;border-left:none’>$969 </td>
<td class=xl7330761 style=’border-top:none;border-left:none’>$54 </td>
<td class=xl7730761 style=’border-top:none;border-left:none’>($4,031)</td>
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<td colspan=4 class=xl7430761 style=’border-right:.5pt solid #006600;
border-left:none’>FAS and FAZ<span style=’mso-spacerun:yes’> </span>$
Difference</td>
<td class=xl7830761 style=’border-top:none;border-left:none’>($8,723)</td>
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This is where things really fell apart. In a declining market, you would have thought that over time FAZ would have performed well, and it did for a short period, but overall you would be down a whopping -93.8% and FAS was right behind it at -80.6%. Which means you were basically trading a stock that was 6:1 leveraged, while FAS was 5:1.
The crazy thing here is that FAS and FAZ are actually suppose to trade opposite of one another, but they don’t. They are victims of time-decay, something you won’t see their creators make any mention of. The best trade here would have been to short these two ETF’s (and I have seen it where shares have been available in the past for these two ETF’s) at inception, and make a ridiculous gain by doing so in the process.
There are a lot of folks out there that like to trade these things, but honestly, there is no value in doing so – it’s just a good way to sucker people into thinking that if they call the sector right, they can make a 3:1 return on their money, but looking at the charts that I provided unless, you held in the very short-term as the first chart displayed, it would not have mattered whether you were on the right side of the financial industry or not, because you would have ultimately been on the wrong side of either trade.
