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Thread: 4X ETF On The Way

  1. Default 4X ETF On The Way

  3. #2

    Default Re: 4X ETF On The Way

    A little dangerous and should probably only be used for very short-term trades because of the way they are re-balanced daily. Here's more on that...

    Dissecting Leveraged ETF Returns

    Daily Rebalancing

    Maintaining a constant leverage ratio, typically two-times the amount, is complex. Fluctuations in the price of the underlying index change the value of the fund's assets, and this requires the fund to change the total amount of index exposure.

    Example - Rebalancing a Leveraged ETF

    Suppose a fund has $100 million of assets and $200 million of index exposure. The index rises 1% in the first day of trading, giving the firm $2 million in profits. (Assume no expenses in this example.) The fund now has $102 million of assets and must increase (in this case, double) its index exposure to $204 million. Maintaining a constant leverage ratio allows the fund to immediately reinvest trading gains.
    This constant adjustment, also known as rebalancing, is how the fund is able to provide double the exposure to the index at any point in time, even if the index has gained 50% or lost 50% recently. Without rebalancing, the fund\'s leverage ratio would change every day and the fund\'s returns, as compared to the underlying index, would be unpredictable.
    On the psychological side, it could be the sign that we're near a market top.
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    I am not a Registered Investment Advisor. Do your own due diligence.

  5. #3

    Join Date
    Sep 2006
    Upstate NY
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    Default Re: 4X ETF On The Way

    A little dangerous
    I had to call TD today about a technical issue regarding a deposit and there was a 2 minute recording discussing margin and how to pay a margin call. It said there are no exceptions and they must be paid off or TD will force sell stocks. No grace periods. The message continued to discuss accounts 'flagged' as day trading accounts and how users must deposit $25k or they will be frozen.

    I kind of got the impression there were many speculators in deep trouble, especially with the rising market as it just seems like the market is defying gravity in the face of such horrible news.

    In 2019 it seemed articles on how to make dividend money with selling covered calls were everywhere. It was so easy - sure thing the bloggers were saying. Options seem very popular today too, but in reality they are nothing but lotto tickets. If I had my choice between options and margin accounts, I'd probably choose options though I dabble in neither. Inverse ETF's are a waste of time as well due to time decay. Nothing more than a bet. All three are toxic.

    Below from today's WSJ. For what it's worth, I don't think these people should get any kind of pity or bailout. Prospectus anyone? Basic income on an ETN or options - 78 years old and sitting on $700k. How much is enough? You can find articles going back to 2008 indicating the toxicity of ETN's and their likely collapse when the underlying derivatives fail.

    A great lesson on why it's important to take the long view. Have a plan and don't try to make up for lost time with leverage of any kind. It's okay to trade, but only around the edges of a core portfolio.

    ‘Bankrupt in Just Two Weeks’—Individual Investors Get Burned by Collapse of Complex Securities
    Seeking high returns, they poured savings into leveraged exchange-traded notes; the coronavirus downturn made some of them nearly worthless

    When William Mark decided to get back into investing after the 2008 financial crisis, he looked past stocks and bonds. Needing to play catch-up with his retirement portfolio, the piping engineer decided to bet on a complicated product he hoped would deliver double-digit annual returns.

    It worked so well—earning him 18% a year in dividends, on average—that he eventually poured $800,000 into the investments, called leveraged exchange-traded notes, or ETNs. When the coronavirus pandemic hit, he lost almost every penny.

    This year, at least 15 ETNs managed by UBS have been taken off the market after tumbling in value. That resulted in a loss of $700,000 for Mr. Zhu, who had purchased the ETN at $13.35. We were just looking for basic income.” He is now suing his online brokerage, TD Ameritrade Inc., alleging the company made the ETN available to individual investors without providing sufficient disclosures.


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