500% gains in leveraged etfs -- is it possible? etf investing etfs explained stock market trading market for beginners options trading strategies welcome to looking at the markets withdavid moadel today's topic is five hundred percentgains in leveraged etfs is it possible mm well let's explore see if it ispossible well i do think it's possible
ticker symbol aapl, a better question is is that realistic well first of all what is an etf justfor a review that's an exchange traded fund it it's kind of like a mutual fund exceptyou treat it like a stock or you can
treat it like a stock mutual funds areoftentimes priced once per day whereas etfs you can you can get them priced andyou can buy and sell them any time during the trading day much like a stock alright so here this is an example or afew examples of some of the more popular etfs and especially leveraged etfs andleverage just a really quick review of leverage that means you can control alarge amount of equities with a smaller amount of money so instead of a one-to-onecorrespondence between money and equities you might have a 2 to 1 or 3 to1 correspondence
alright so for example if you havesomething like sds this that's an example of a leveraged etf andit's triple leveraged and so you're controlling three times the amount asyou would if you just went short the s&p 500 all right and by the way i always liketo put these sources whenever i can whenever possible so i can give creditand that this is from etfdb . com alright so some of the more popularleveraged etfs would include sds that's the tickersymbol and that's all trash or three times short for the s&p 500
so for example if you were to purchaseticker symbol sh that has a one-to-one correspondence that's one x short thes&p 500 but this one go would go this in the same direction assh except it would go three times in thatdirection they moved three times as fast you've got nugt which is the gold minersbowl bullish on gold miners all right and that's three times leveraged etfyou've got your ss 0 which is leveraged for the s&p 500 you've got your you know yet all kindsof leveraged etfs you've got you know triple leveraged for for long
financials you've got triple leveragebullish for the queues which is the tech sector so on and so forth x sspx youthat's a popular one and that's triple leveraged short for the s&p 500 kind ofkind of the same as sds are pretty similar to it and this one's for largecrap large large cap growth you get the idea these are just a fewexamples now let's look at the performance here yes it is possible to get five hundredpercent gains in leveraged etfs for example and you gt year-to-date gains orprofits of five hundred thirty-six percent approximately
alright so yes it is possible but that's if you got in at exactly theright time and if you held on all this time and but what if you got in at thewrong time what if you bought it just today welllet's look at the one day change for nugt that's nine and a half percent lossin just one day so is this type of game realistic well my opinion is no but we're going tocontinue to talk about that and as you can see these things thesetriple leveraged etfs are big big movers all right you know you look at spx youit's down almost twenty percent for the
year you look at you know sds it's down almost eighteen percentpretty for the year sso is up a little bit over fourteenpercent for the year compare that to sp why the spiders whichis up about seven percent for the year so far so these triple leverage you know instruments these etfs therethat they're big movers and you have to be really careful with them for thatreason but there's an even bigger issue
with leveraged etfs and this is a prettygood explanation of contango and i got this from investor junkie and a coolname interesting name . com so let's justgoing to read this really quickly because it gives a better explanationthan i probably would if i tried to paraphrase it perhaps the biggest issue with investingin commodity etfs and not just commodity but all etfs but you know right nowthey're talking about that type of etf biggest issue perhaps is contango whatis that well contango is an issue that comesinto play with any investment that is
futures based and these leveraged etfsthey're mostly futures based contango is a situation in which the near-monthfutures are actually less expensive than those that expire later on as a resultwhen the role process is underway it can easily result in selling low andbuying hi this is a situation that investors don't want to be in since thatmeans losses yes they're constantly selling the thecurrent nirmaan futures and rolling it the rolling it forward they're sellingthe current month futures and then buying the more expensive you know further out month futures and that meansthat again
you're selling at a lower price and thenbuying the more expensive ones which is going to cause losses whenever they roll forward like thatcontango becomes more obvious when investing with leveraged etfs that'swhat we're talking about today leveraged etfs are etfs that aredesigned to magnify gains or losses compared to an index so for example if you and invest inproshares ultra s&p 500 sl and you saw that on the previous slide that's designed to give two times thereturn of the underlying s&p 500 index
yeah so in theory if let's say sp whyspiders went up you know a dollar than sso should go uptwo dollars it should but here's the issue the issueis this every day the indexing is reset since the etf isfutures based over time your returns do not match smp 500 x 2 because of this a leveragedetf should only be used as a short-term up to a few weeks at most and i don'teven think i would go that far out a short-term investment so thanks to investor john key calm forexplaining that really well and so yeah
they're constantly rolling the rollingforward they're selling the the current futurescontract and then purchasing a more expensive you know further out contract and soyou're losing a little bit of money and every day every day even if the tradegoes in the direction you wanted to you're losing money losing money becauseit's future is based and are constantly rolling out and i found another source this is from seeking alpha dot com anarticle on seeking alpha which has some good articles there like to read themfrom time to time and this shows how bad
it can get alright so sp why the spiders and thatthat's an etf it's not leveraged it just tracks one time the s&p 500 index andthat's the brown line okay over here and you can see you knowgoes down and up not too far it's pretty moderate and actually during thistimeframe from about two thousand ten to about two thousand twelve we can see itdid didn't go very far it kind of ended up where it started it's pretty flat but it had its downsand it's ups right now what if you had purchased x sspx you which is tripleleverage three times
short the s&p 500 alright and so that's the blue purplishblue line alright so as you can see when the s&p 500 went down it went up and itwent up yeah i guess you could say about threetimes as much what you would expect ok but look what happened so in the shortterm yeah maybe you could maybe you could usethat possibly but look what happens over time if you held onto it down down downdown down huge loss look at that it ended up aboutthirty percent down
yeah that's that's a really massive loss now what if you had gone the other waythough what if you had purchased you pro upro take our symbol three times leveraged long or bullish on the s&p 500 alright so that's the opposite trade andthat's the green line here all right well went down but then it went up andyou'd expect it to get you think that if it's if the spx you finished on thischart down you'd expect you pro to finish way up right well it doesn't work like that becauseof contango that also finished about 25
let's say twenty five percent down sowe've got in this time frame on the chart you've got the three times short s&p 500 leveraged etf finishingdown about thirty percent and yet the triple leverage long or bullish smp 500finish down about twenty five percent you lost big time either way and that's because ofcontango so even if the underlying finishes flat you lose you can loseeither way and you can lose big time so what's the takeaway from all this leveraged etfs might be okay forextremely nimble day traders and i say
might i don't even necessarily recommendit for that but since they tend to roll forwardevery day a lot of these etfs maybe within thesame day before the closing of the trading day you might be able to use it maybe but really why deal with contangowhen you can also get good leverage with colin put options for my money it's thesmarter way to go and i mean options are the smarter way to go and yes options have their own issuesthey have time decay eating away at them if you hold on to them for too long andand the underlying doesn't go the way
you want it to go sure but at least you're not dealingwith contango at least you don't have these negative surprises either way soand i've made other videos about the advantages and disadvantages of optionsbut i would i would strongly recommend against holding onto leveraged etfs forany real length of time and even if you're going to use them for a shortlength of time just be aware that you can you can havevery negative surprises with them my opinion is if if you don't trulyunderstand them and really know what you're doing
i would avoid leveraged etfs so if youneed some help with this if you'd like some more informationabout etfs stocks or my preferred investing and trading vehicle optionsyou can contact me anytime my name is david modell and my emailaddress is david modell @ gmail.com and by the way if you liked this video feelfree to give it a thumbs up or subscribe to my channel if you haven't done thatalready i'm trying to constantly come out with new material stuff to reallyhelp you the viewer make smarter decisions and avoid making huge mistakesif i could even help one person avoid making a big mistake
whether it's with leveraged etfs or penny stocks or binary options or any ofthese things that i don't really recommend arm you know then then i feel that this is all worth itfor me so you know contact me anytime and thanks a lot i hope to hear from yousoon
