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Saturday, June 27, 2009

Blind Sighted and One Sided

I watched Transformer2: Revenge of the Fallen and in my opinion, it was an awesome movie.

I read another article about leverage ETF today and have to think people are really blind sighted or one sided. People who write these articles don't paint the entire picture.

Before I go further, I am not suggesting or recommending leverage ETF. The decision is ultimately yours to make. I have blogged about Beware of Leverage ETF and Break Even Point before. Look for it on the blog if you have not read it.

SPY trades at 91.84. If you want to short 200 shares, it will cost you 18,368. Buying SDS, 2x leverage cost you 5,560. Numbers are based on 06/26/2009 closing price. The difference between money invested is 12,808. So? What you are missing is opportunity cost. The opportunity that 12,808 could make you money in another stock.

Another thing that I keep hearing about leverage ETF is time decay. However, no one can can show any data on this supposedly time decay.

Let's say you have 100k invested in SPY. One month it goes down 10% and the next month it goes up 10%. Are you are break even. NO! It must be time decay. NO! It's just math.

Next, you cannot short in IRA. Here is a hypothetical 100k portfolio.

60k invested, 30k cash, 10k (discretionary 3x leverage).

Run those numbers taken into consideration 10% rise and fall in the market with and without 10k invested in 3x leverage ETF.

Honestly, I sure would have love to have the ability to invest in leverage ETF for my wife's 401k plan. It sure beats having to buy and sell. Money market provides negative return. An 85/15 or 90/10 split would be ideal. Let's say I do 85/15 and SPY goes to 3000. The most I would lose is 15%. 15% cost to protect the portfolio is cheap considering that most have lost 50%.

You pay that much if not more in taxes.


In my example, I was using shares for comparison, which is flawed. I should be using dollar invested.

For example, you and I have 5k to invest. You invest 5k in SPY. SPY was up 10% end of day. Your account is now at 5.5k = 10% return. I on the other hand invest 2.5k in SSO. My account is now at 5.5k = 10% return, but with 1/2 the capital.

The danger with leverage ETF is oscillation of price. But if there is a trend, then the benefit is definitely there.