Posted on 11/26/2009 6:04:06 PM PST by MeneMeneTekelUpharsin
NEW YORK (TheStreet) -- In what could be be a major blow to ultra-long and utra-short ETFs, the Financial Industry Regulatory Authority announced Tuesday that it would be raising margin requirements for leveraged ETFs on Dec. 1. In Regulatory Notice 09-53, FINRA notes that it will be implementing increased customer margin requirements for leveraged ETFs and uncovered options overlying leveraged ETFs. Leveraged ETFs like the Direxion Daily Financial Bull 3X(FAS Quote) and Direxion Daily Financial Bear(FAZ Quote) have become increasingly popular with investors over the last year. These funds use derivatives like futures and swaps to achieve ultra-long or ultra-short exposure to their underlying indices.
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What’s an ETF? What does this mean?
Exchange Traded Fund ,, like a mutual fund but traded on a stock exchange... a good example of what they’re talking of limiting is SKF.
Cute!
I can see reasons to own, in some circumstances, funds that track 2X an index or the inverse.
Those triples, though, are like 151 proof rum. You'll get buzzed fast, but probably puke your guts out and wind up face down in the gutter. That's what happened to me.
I've used some of those over the past year, (FAS, FAZ, TNA, TZA, DXO, BGU) and lived to tell the tale.
I received my first margin call letter ever in March as a result of smoking this stuff.
That the market then turned around and I ended up ahead makes me look smart.
Believe me, I was not smart. I was very foolish thinking that I could ride these things.
The article you cite is dated September 1, 2009.
That is almost three months ago.
Anyone unaware of this margin requirement change shouldn't be playing with leveraged or inverse funds. They should not be involved with speculating in stocks of any kind, nor should they be driving, voting, allowed around sharp objects, or left unattended at home.
You cannot hold a position in ANY of these 2X/3X ETF’s, whether long or short, for an extended period of time. The time decay of the underlying instruments they use will crush you in the long term.
What people must understand about these instruments is that they seek to return 2X or 3X the DAILY change of the underlying. They’re not structured to return 2X or 3X of the change in the underlying over time. Just within a one-day timeframe. That’s it.
If you have a market where you get a big move, followed by a period of low volatility, the time decay of the derivatives inside these “ultra” ETF’s may well burn up any gain you realized in the initial move.
I never hold these instruments longer than 3 days.
Interesting indeed.
Where are U.S. market futures trading at this precise moment and how can I participate?
Unless you’re connected in a big way via the overnight trading of markets, you can’t participate. What you can do if you have enough money is short FAZ in the morning when the market drops and make a killing when it comes down after the government props up the markets here.
I bought 10K of SRS about 9 months ago. It went up $600 between my order and the close. I sold it the next day, realizing that anything that goes up that fast could go down bigtime in the blink of an eye.
This stuff is just too volatile for me in my old age.
Having been crushed I know that you speak the truth. It also depends on the specific instrument you're trading. I got nailed on the double long oil, DXO, by that specific price erosion you refer to.
Other leveraged funds track their underlying indices with greater or lesser accuracy and efficiency. Buyer beware for sure.
I maintained a position in a double long midcap, MVV, for almost 10 months. It didn't replicate 2x the underlying index and never claimed it would.
But for that security in those circumstance I have nothing to complain about. I could not have easily realized similar results without resorting to much more complicated techniques.
These are rarefied products and I don't think people should carelessly play with them.
Other than that, I think that generally ETFs can be very consumer friendly, low-cost, potentially tax efficient ways to trade and invest.
They have made a very positve contribution.
Leverage and margin has always and will always cut both ways.
I have never gotten hurt so much or so fast as I have playing with triples.
And I've never taken such profits so quickly either.
I've never smoked crack or used crystal meth, but I think it must be something like taking a long position in one of these triples.
Like a recovering alcoholic, I hope that I have quit while I'm ahead.
One can get screwed pretty badly in the leveraged ETF’s if you happen to be unlucky enough to own one when they unload a capital gain/loss distribution. I saw it happen at the end of 2008 with QID, the ultra short Nasdaq 100.
That being said, one of the better trades I ever made was buying QID in late May, 2008 at $37 and change and exiting in November, 2008, just shy of $100. I was out a couple of weeks before they sprung a huge capital gain distribution, without warning.
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