When to Invest in Leveraged ETF's

inaugurationIn recent weeks, there has been a lot of talk of these inverse etfs we discuss so frequently on this site and whether they are a legitimate vehicle for investment in this market. Some analysts, such as Cramer, feel that these funds should be taken off the market. Although Cramer can say some educational things sometimes, his banter on this subject must be from a personal vendetta he has with the funds, because his argument is just plain nonsense. When I look into my portfolio from Zecco.com, I notice that most of my portfolio is made up of these etfs right now. I have made a lot money from these in the past. I have also lost some. The point is, although there are flaws (if you want to call them that) to the funds and they can cause a lot of stress, there can still be A LOT of money made with playing them at the right time and in the right way.

A key element to the success of these etfs, is the VIX level. VIX (Volatility Index of the S&P) has proven to have a strong correlation with the performances of these funds. As the VIX index is higher, so is the volatility. In turn, having the "fear index" raised during the more volatile times puts even higher premiums on the purchase of options. These funds consist largely of swaps and option purchases. This is why you see the greatest gains from these funds during the highes peaks of the VIX. And even more so downward on the low peaks (see below).


vix charts
As you can see from the graph below, SKF and SRS (two of Proshares most popular 2x inverse etfs) track almost directly with the VIX , just more exaggerated. The separation is even worse on the down swing. This is why when people analyze the funds on 1 year+ holding terms, the numbers don't equal out, because the number can fall at a more rapid rate than it went up. This is largely due to where the VIX levels are at and where the momentum is. These past two months, the market became very consistently bullish, which shot down the prices of these funds much dramatically then they went up. Because of the sophisticated nature of these funds, with the swaps and options, as well as the management fees, these funds can move at a much larger rate than their claimed 2X leveraged of their measured fund. This can be a two edged sword as they can indeed yield stronger gains than just 2x the funds movement or lose more on the way down.

It is for this reason everyone is hating these funds right now, because they have lost so much value recently. However, with the combination of the even more so weakening economy and the VIX levels reaching over 50 on Friday (lows were at 38 and highs were at 80), I am more and more seeing big opportunities for these etfs again. Just from the 38 to 50 move in the index, Many of these funds have jumped 20-35% in a week. They are obviously to be played on momentum and volatility. If the VIX continues to move higher the next couple of weeks, there could be some serious gains by these funds.

It is hard to just pick a day on a calender and do a yearly analysis on these funds as you would a normal stock or mutual fund. Because of the rate of change that these funds can move at, it can be up 150% in 2 weeks or vise versa. Two months ago, no one was questioning the return abilities of them. At the time they were all $200+! It is all about timing the bumps right and getting on the right side of the momentum. Keep your eye on the VIX levels, because if it continues to push upward, you can expect to see strong gains from these funds. To sum it up, I'm a bull on SRS, SKF, FXP(or FAZ) and EEV.

UYG is one to be considered just for this week as Obama is put into office, but I'm not going to hold it for long. Banks should get some love as hopes for the biggest bailout ever is present. However, as we discussed last week, the crater to fill is much deeper than the shovels of dirt he plans to throw on it.

Here is a great trend analysis site ( Click Here) where they will take any symbol your tracking and do a great fundamental analysis on it. I've used it on these funds, and they work well. They are also offering a free video tutorial on expert training and technical analysis, Click Here. Definitely worth learning about in this market. Check them out, they'll give you free trials, all they need is your email and name.

Have a good evening everyone. Happy MLK day and lets see if Obama can tackle the biggest financial crisis this country has ever seen. Happy Trading.

7 comments:

  1. John Says:

    change is here obama Yes We CAN!!!

    http://finance.google.com/finance?catid=58211593


    Losers (% price change)
    Lloyds TSB Group plc LYG 2.87 -3.33 (-53.71%) 6.21B
    State Street Corporation STT 18.58 -17.77 (-48.89%) 8.03B
    Bank of Ireland (ADR) IRE 2.25 -1.82 (-44.72%) 564.87M
    Barclays PLC (ADR) BCS 4.20 -3.05 (-42.07%) 8.79B
    PNC Financial Services PNC 25.20 -12.34 (-32.87%) 8.77B
    Most Actives (dollar volume)
    SPDR Trust, Series 1 SPY 82.11 -2.95 (-3.47%) 69.57B
    PowerShares QQQ Trust, QQQQ 28.33 -1.09 (-3.70%) 10.80B
    iShares Russell 2000 IWM 44.29 -2.19 (-4.71%) 7.98B
    Wells Fargo & Company WFC 14.93 -3.75 (-20.07%) 49.65B
    JPMorgan Chase & Co. JPM 19.63 -3.19 (-13.98%) 73.27B

    wow have obama loves sleeping with bears. I guess the Bulls got fool no love for the bulls SORRY MR.BULL

    DOW30 6,000 or new down target is
    DOW30 4,600- 4,000 but this should be year end not now

    FF and ME told guys and girls watchout below!!!!!!!!!!!!!!

    man I can smell more HOPE in the air lets see a 500-600pts fall in dow today to mark OBAMA DAY.

    And no I dont hate him I love it when hes on the bears side thank you Obama Yes man CHANGE IS HERE!!!!!!!!!!!!

    all that last friday and thursday
    was option X when funds burn the options to EXP worthless to the small hands and make a fools rally or bull trap made by the bears add more to the shortside or use FAZ SKF EEV SRS SDS QID DXD TWM.

    relax and be cool bears.
    cause bulls are for a wakeup of a lifetime.

    YES bank stocks falling hard and the SKY IS FALLING.
    this only start of rain of Blood for bulls. NO this not the bottom NO NO NO NO NO NO NO NO IAM not seeing it. cnbc see one LOL what fools???????????????????????

  2. John Says:

    Post freely what think of my post and dont be Shy friends. I love hearing from you guys and girls
    comments. So post whats on your mind freely. Ask anything from stocks,bonds,gold,silver,oil,tech,banks, market forcast for 1year 6months??
    or VS my post or whatever you like. Goodbye till the next post.

    know this is place to help you?
    not nuts on the yahoo and google....

  3. Finance Fanatic Says:

    Well, I'm sure this is an awakening for the believers of change. Wow, I didn't think we'd be seeing this reaction until Thur or Fri. Ouch, scary week (unless your short), look at the VIX. I may buy some more gold before the close.

  4. sheeet Says: This comment has been removed by the author.
  5. sheeet Says:

    finance you're so money. i too was quite shocked to see the markets tumble this morning as anyone else. i had some aib shares, which i sold a few days ago ~5.4 (thank god). woke up today and saw it tumble >65%. i'm sitting on srs right now trying to cook up a decent exit plan after shit hits the fan with real estate. any more advice for timing when it comes to srs? do you guys think decent international banks like aib have a chance for growth in the future? thank you and john for all the advice

  6. John Says:

    Hi sheeet would not look to bottom pick in banks usa or international.
    I just dont see cheap or value in anyone one of them. But see fxp eev skf faz srs cheap and value in them all. I add more to my holdings I have 20%faz,20%fxp, 20%srs,10%GLD, and 30%Cash for value days like today. what nice pullback for the Bear ETFS nice.

  7. QUALITY STOCKS UNDER 5 DOLLARS Says:

    I would never invest in leveraged exchange traded funds. The risk is way to high.