# Leveraged/Inverse ETFs



## gibor365 (Apr 1, 2011)

Last month or so = disaster. On one hand I don't want to sell and take loses (as I think that I have a not bad portfolio for a long term - all my accounts are registered and TFSAs), on other hand - losses are becaming too big.
So as a possible hedge against cruching market, as alternative of selling, I was thinking to take small position (cannot take big one - no available money left) in one of Horizons Leveraged/Inverse ETFs: 

HXD (Horizons BetaPro S&P/TSX 60 Bear Plus ETF - 200% short), 
HSD (Horizons BetaPro S&P 500 Bear Plus - 200% short) or
HIX (Horizons BetaPro S&P/TSX 60 Inverse)

I never played short, so wanted to hear your opinion.


----------



## Four Pillars (Apr 5, 2009)

It sounds like you have a portfolio that is too aggressive and you aren't comfortable with big losses.

My suggestions are to change your asset allocation or do some reading which will hopefully make it easier to weather bad markets - I recommend Four Pillars of Investing, but I'm sure there are other good ones as well.


----------



## gibor365 (Apr 1, 2011)

Four Pillars said:


> It sounds like you have a portfolio that is too aggressive and you aren't comfortable with big losses.
> 
> My suggestions are to change your asset allocation or do some reading which will hopefully make it easier to weather bad markets - I recommend Four Pillars of Investing, but I'm sure there are other good ones as well.


I don't think it's too agressive.... About 40% of money I hold in HISA, GIC, Bonds.
From 60% in Equites, the most agressive XCS (Can small cap) - 4% (of 60%), XMA - 3.5%, Goldcorp 1.8%, ZJG - 2% (gold mining junior) , couple of others - 1%. Mostly I hold US/CAN indexes, Canadian banks, Telecoms, other blue chips.

My time horizont for those accounts at least 10 years, some of them (like my wide LIRA) up to 30 years, so I strongly believe that we'd recover losses, but it's tough to see when your portfolio value going down 2K-3K in one day, this is why i started to thing to hedge with inverse ETF


----------



## andrewf (Mar 1, 2010)

This is not even a particularly big correction (yet). We haven't even broken the 200 day SMA yet in most markets. I agree with FP that you probably overestimated your risk tolerance.

With inverse funds, you need to be able to time downward moves. It's harder to do that than to time upward moves, in my opinion. You might be buying a -200% inverse ETF in the trough of the downturn and will lose 10% when the market recovers. I think you ought to stick with your plan and re-evaluate your risk-tolerance going forward.

I have an exit strategy to deal with large down-turns. I haven't hit my sell-point yet (TSX is pretty close), and won't make any moves for a couple weeks. Does that reassure you? I'm not a trader though.


----------



## MoreMiles (Apr 20, 2011)

I have asked a similar question a few weeks ago. Humble pie and other people were very nice to take time to explain hedging to me.

http://canadianmoneyforum.com/showthread.php?t=7325

Essentially, the easiest way to do is to exit your current positions and claim the losses. You can deduct those from future capital gains. If you want to hedge with inverse funds or put options... they will all cost extra.

The other way to look at the hedging, do you want to lose 5-10% already (ie. hedging premium) before you even realize any protection? If you are so sure, then you should simply sell. If you are not sure, why not take the risk and include that 5-10% as part of your long-term asset? Don't give that to an option writer or ETF vendor.

Yes.. most people, especially young males, overestimate their risk tolerance. Many claim they are doing it for the long term.. so it's okay to be in volatile stock markets. However, when you start to see your saving dropping in amounts equivalent to what you need to make 1-2 weeks per day... then it all changes the perspective.

How many people asked themselves yesterday...? "oh man, that loss is equivalent to me working for 1 week, just in 1 day... and now I have to work another week for free just to get back that loss"


----------



## bmckay (Mar 10, 2011)

Just hold on. I think everyone has taken a pretty big hit the past while. Keep your emotions in check. 10 years from now you won't even remember this dip.


----------



## ddkay (Nov 20, 2010)

How are you measuring andrewf? Using daily period SMA or EMA I see we broke through S&P/TSX Composite 200DMA on June 8.


----------



## ddkay (Nov 20, 2010)

Make sure you know how those ETFs are designed before you throw money in them.



> Example D, Inverse ETF, No Leverage, Rebalanced Daily (i.e., the Inverse ETFs): Assume you invest
> $100 in ETF D, an inverse index fund that seeks to match the inverse daily performance of its underlying
> index or futures contract. If the underlying index or futures contract decreases 10% on day one, the value
> of your investment in ETF D would be expected to increase $10 (10% of $100) to $110. The next day, if
> ...


----------



## Mike59 (May 22, 2010)

ddkay said:


> How are you measuring andrewf? Using daily period SMA or EMA I see we broke through S&P/TSX Composite 200DMA on June 8.


I agree...
XIC crossed below it's 200 day SMA late morning yesterday. I promptly exited all my Canadian Index Funds to collect profits (and avoid feeling sick to my stomach any further). 

Here's to sitting on the sidelines in cash until the next bull run  I wish I was gutsy enough to play the 2x Bear ETF


----------



## gibor365 (Apr 1, 2011)

MoreMiles said:


> I have asked a similar question a few weeks ago. Humble pie and other people were very nice to take time to explain hedging to me.
> 
> http://canadianmoneyforum.com/showthread.php?t=7325
> 
> ...


I cannot deduct any losses as I hold equites only in registered accounts.
I don't understand writing options, so I was just thinking to buy inverse ETF. I don't understand what hedging premium you are talking about  

My understanding was that if for example XIU on Monday going down 1%, HXD (Horizons BetaPro S&P/TSX 60 Bear Plus ETF - 200% short) will go up 2%. So, if you have 10K in XIU and 5K in HXD - you lose only commissions....
If market recovers , again I won't gain anything on XIU/HXD combination, but I'll gain on other securites... Am I wrong?


----------



## gibor365 (Apr 1, 2011)

Mike59 said:


> I agree...
> XIC crossed below it's 200 day SMA late morning yesterday. I promptly exited all my Canadian Index Funds to collect profits (and avoid feeling sick to my stomach any further).
> 
> Here's to sitting on the sidelines in cash until the next bull run  I wish I was gutsy enough to play the 2x Bear ETF


different strategies.... somebody sell on such dip, somebode buying more, somebody just hold and somebody buying reverse ETF.... Tough decisions....


----------



## CanadianCapitalist (Mar 31, 2009)

Leveraged ETFs are meant to track _daily_ stock movements. You might be right on the direction of stock prices over the next little while and could still lose money with leveraged inverse ETFs. They are not appropriate investments for most people.


----------



## Belguy (May 24, 2010)

I am somewhat amused by the antics of younger investors during times of market declines partly because I remember how I was like that myself in my early investment years.

Now, after going through the school of hard knocks, I am older and (I hope) wiser.

Buy, hold, rebalance and prosper and be honest with yourself about your risk tolerance when establishing your target asset allocation.

During your investment lifetime, you are likely to experience many gyrations in the markets which seem to be becoming even more volatile of late.

Most seasoned investors would advise you not to panic and avoid selling low and buying high. Successful investors do exactly the opposite!!!


----------



## Sampson (Apr 3, 2009)

If you are extremely worried, then perhaps you can use an equity collar strategy or even an insurance product like a segregated fund.

I've never seen any primary research, but I believe these strategies under perform naked strategies over time.

They would give you the protection it seems you want.


----------



## andrewf (Mar 1, 2010)

ddkay said:


> How are you measuring andrewf? Using daily period SMA or EMA I see we broke through S&P/TSX Composite 200DMA on June 8.


I use total return 200 day EMA, personally, but it's a matter of taste. You could use 150 day, 250 day, 120 day with fairly similar results. You just need to pick one and stick with it.


----------



## Mockingbird (Apr 29, 2009)

CC nailed it on the head.

*"Leveraged ETFs are meant to track daily stock movements."*

That should answer OP's question.

MB


----------



## andrewf (Mar 1, 2010)

Sometimes leveraged ETFs work against you, but other times they work in your favour. A case in point is UGL, a 2x gold buillon ETF vs IAU, a physical gold ETF. Over the last two years, IAU returned 59.5%, whereas UGL returned 127.7%, an outperformance of the 8.7% beyond the 2x leverage, and without needing to pay for margin interest.

Leveraged ETFs, especially leveraged 'bull' etfs get a bad rap. They don't necessarily track well over long periods, but when markets are trending up without a lot of rapid, substantial declines (like 2008), they can perform very well.

I think many people get confused with the problem futures commodities ETFs suffer from, of hemhoraging value due to contango/roll yield in the underlying futures. Obviously this effect is amplified in leveraged ETFs. Thus people lose their shirt on those natural gas or oil ETFs. Equities tend to behave much differently.


----------



## Mockingbird (Apr 29, 2009)

Agree with you andrewf, but you said it..

"... *when *markets are trending up without a lot of rapid, substantial declines."

When and which instrument will that be next? Awful lot of risk for any novice investors - IMHO.

MB


----------



## zylon (Oct 27, 2010)

*Single and Double inverse to TSX 60*

Here are the results of an experiment with TSX 60 index
and two Horizons bear funds. The numbers speak for themselves.
In dollar terms, the Double had less erosion than the Single.


click on image to enlarge


----------



## andrewf (Mar 1, 2010)

Mockingbird: definitely. An investor has to have some risk-management plans in place to use these responsibly. It gets my back up when I hear people *cough* Larry Berman *cough* say that these are not 'buy and hold' instruments, and should only be used for short term trading. The evidence does not support this position. The proof is in the pudding. You might have a case for bear ETFs, but it's always harder to guess the timing and magnitude of downward moves than to ride an upward trend.

He also either explicitly says or implies than leveraged ETFs will necessarily trail the underlying by their stated leverage. As I demonstrated, sometimes this 'sequence of returns risk' (h/t MG) works in your favour as well as against you. I've seen research that indicates there is not a significant downward bias in this SOR risk. There's a lot of fear, uncertainty and doubt out there about these products, which I think is unjustified.


----------



## CanadianCapitalist (Mar 31, 2009)

The rap that HXU/HXD receives from buy-and-hold investors is richly deserved. If you take a quick look at the performance numbers of leveraged ETF products reported by HBP, you'll find that they are all pretty awful. It doesn't even matter which fund you pick, they all have pretty poor performance numbers since inception.

http://jovian.transmissionmedia.ca/fundprofile_betapro.aspx?f=HXU&lang=en

http://jovian.transmissionmedia.ca/fundprofile_betapro.aspx?f=HFU&lang=en

http://jovian.transmissionmedia.ca/fundprofile_betapro.aspx?f=HSU&lang=en

http://jovian.transmissionmedia.ca/fundprofile_betapro.aspx?f=HJU&lang=en


----------



## andrewf (Mar 1, 2010)

I think using proper risk management ought to help considerably with slippage you'll see through periods of high volatility. Using something like value averaging would help considerably.

Maybe HBP doesn't do a good job of running their funds. Many of the US-based leveraged ETFs perform decently, especially if you do some market timing/trend following. I'll note that most of the underperformance occurred in late 2008 and early 2009. An investor in the S&P 500 should have sold at the end of 2007 and sat out of the market through to May 2009 or so, just using a basic 200 day SMA timing system.

I agree that they are not appropriate for people who want to buy and hold forever. But, they can work very well for people with investment horizons of well over a year. They provide leverage without exposing oneself to the risk of margin calls/illiquidity. It also allows one to gain leverage without needing to pay margin interest at a brokerage. Those two features provide some value, so there is bound to be a cost to that. Some underperformance can be forgiven.


----------



## cannon_fodder (Apr 3, 2009)

andrewf said:


> Sometimes leveraged ETFs work against you, but other times they work in your favour. A case in point is UGL, a 2x gold buillon ETF vs IAU, a physical gold ETF. Over the last two years, IAU returned 59.5%, whereas UGL returned 127.7%, an outperformance of the 8.7% beyond the 2x leverage, and without needing to pay for margin interest.
> 
> Leveraged ETFs, especially leveraged 'bull' etfs get a bad rap. They don't necessarily track well over long periods, but when markets are trending up without a lot of rapid, substantial declines (like 2008), they can perform very well.
> 
> I think many people get confused with the problem futures commodities ETFs suffer from, of hemhoraging value due to contango/roll yield in the underlying futures. Obviously this effect is amplified in leveraged ETFs. Thus people lose their shirt on those natural gas or oil ETFs. Equities tend to behave much differently.


Not everyone loses their shirt on leveraged NatGas ETFs (eg HNU/HND). The volatility is desirous because rewards are huge - IF you're successful. I find that most daytraders don't do well. Those which buy near the bottom of recent ranges and sell near the top appear to do better. 

Ironically, from my empirical observations, it's the buy and hold traders which generate the most profits. Now buy and hold in this world means weeks and perhaps even a couple of months. 

In the past 5 months I've executed about 55 sell orders and two of them were losses. Average gains on the ETFs themselves were over 16%. I just started some options trading in the past 30 days on them and have only about a dozen trades, all positive with holding periods of one or two weeks, and average gains of 170%. The lack of liquidity reduces the potential for gains unfortunately both in absolute $ and percentage terms. 

Although I had tremendous success (by my measures) last year, with more knowledge and experience and a modification of my trading strategy, I've seen a marked improvement. Especially the elimination of losing trades.


----------



## alphatrader2000 (Aug 18, 2010)

gibor said:


> Last month or so = disaster. On one hand I don't want to sell and take loses (as I think that I have a not bad portfolio for a long term - all my accounts are registered and TFSAs), on other hand - losses are becaming too big.
> So as a possible hedge against cruching market, as alternative of selling, I was thinking to take small position (cannot take big one - no available money left) in one of Horizons Leveraged/Inverse ETFs:
> 
> HXD (Horizons BetaPro S&P/TSX 60 Bear Plus ETF - 200% short),
> ...


I suggest simply shorting an XIU; otherwise, holding these double etf in a volatile environment will add a losing dimension to your trade.


----------



## gibor365 (Apr 1, 2011)

alphatrader2000 said:


> I suggest simply shorting an XIU; otherwise, holding these double etf in a volatile environment will add a losing dimension to your trade.


I can't , I have only registered accounts


----------



## cannon_fodder (Apr 3, 2009)

alphatrader2000 said:


> I suggest simply shorting an XIU; otherwise, holding these double etf in a volatile environment will add a losing dimension to your trade.


You also have to be careful with shorting shares. As discussed in other threads both here and at other forums (e.g. http://blog.taxresource.ca/expense-paid-on-dividends-of-short-sale/), the CRA can consider profits to be counted as regular income, not capital gains.


----------



## Four Pillars (Apr 5, 2009)

cannon_fodder said:


> In the past 5 months I've executed about 55 sell orders and two of them were losses. Average gains on the ETFs themselves were over 16%. I just started some options trading in the past 30 days on them and have only about a dozen trades, all positive with holding periods of one or two weeks, and average gains of 170%. The lack of liquidity reduces the potential for gains unfortunately both in absolute $ and percentage terms.
> 
> Although I had tremendous success (by my measures) last year, with more knowledge and experience and a modification of my trading strategy, I've seen a marked improvement. Especially the elimination of losing trades.


Ok, I'm sold. When are you opening up the Cannon Fodder Gas" to outside investors?


----------



## cannon_fodder (Apr 3, 2009)

Four Pillars said:


> Ok, I'm sold. When are you opening up the Cannon Fodder Gas" to outside investors?


Aren't people who put out recommendations on what/when to buy often criticized based on the premise that if they were really that good they wouldn't need to go public? 

The point is, it is possible to make $ on these leveraged ETFs. Based on people I interact with, I'd estimate more people are big losers than big winners. But the big winners are up more than the big losers have lost. And the losers are very likely to not understand anything about what they are doing.

One really needs to educate oneself on not only the underlying fundamental, but other aspects of the ETFs themselves such as decay and backwardation/contango.


----------

