Actually, I have calculated the fund price move versus the underlying indices and the 2X funds experience about 1 and 1/2 percent per month time decay, bid/ask spread and slippage due to the use of futures and options.
The full text of my earlier statement suggests that the funds might drain some capital from the funds if the indexes never moved.
"Actually, I believe there is already an example of a similar thing on the market. If you look at their behavior carefully, the 2x Profunds and the 2x Rydex funds are somewhat similar to non-decaying options. They are not exactly the same thing, but their behavior to the downside is similar to an option that never expires, although I expect these funds drain off some value over time if the underlying index never moves."
However, a curious thing about these funds is that it is difficult, if not impossible, to attribute this drain to slippage or spreads or fund expenses or any other such things. The fact is that the value of the fund corresponding to any particular value of the underlying depends on the path the underlying has taken to get there, even if there is no loading whatsoever. It is the nature of the compounding of the returns that causes this.
The funds seek to perform 2X on a daily basis, and they do that quite well, but 2X on a daily basis does not translate into 2X over several days of up and down movement. I created a simulator that uses random numbers to generate movement of an underlying, and applied +2X and -2X on a daily basis to demonstrate this effect. It shows that if the underlying makes a run up and then back down, both the +2X and the -2X funds will lose money. The good news is that for an extended move up, the +2X fund goes up more than 2X and the -2X goes down less than 2X.
I don't doubt your results, but I can show periods of time where the actual Rydex and Profunds results have outperformed the nominal 2X over a long time frame. For example, if you set this chart up to range from 7 October 2002 to 6 January 2004, while the NDX went up 86.58% the Rydex RYVYX went up 199.24% and the Profunds UOPIX went up 203.05% (you can read the numbers from the pop-ups while pointing at the graphs.
stockcharts.com
If you look at the -2X funds over the same period of time, you can see they have not even dropped 80%.
A similar result is obtained if you set the range from the March low to the present. So even if there is some drain of capital from the funds from loading or slippage, I don't know how to de-couple that from the compounding effects evident from the model calculations.
I've looked at the chart set to a range of 2 days to see the one day performance. There is some variation from one day to the next, some days being a bit more than 2X and some days a bit less. I suppose if one had all the daily numbers you could average over the one day changes and see how they came out. I tried this, but there seems to be a lot of bad data from Yahoo. It's too much work to clean it up. |
