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Strategies & Market Trends : CEF and ETF

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From: Julius Wong	6/7/2009 8:24:03 AM
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Do Not Buy and Hold 3X ETFs for long Term Many articles reported the less-than-expected performance by 3X ETF funds over longer periods. These articles presented data over various periods and illustrated with plots. Here I'll offer a math explanation by a model. The stock prices go up and down, or cycles. Let's consider an idealized cycle, up leg equals down leg. Use a 5% leg, 1. Cycles do not favor buy and hold In one cycle (1.05)(.95) = 0.9975 The buy and hold is behind 0.0025. In 3 cycles, (0.9975)(0.9975)(0.9975) = 0.9925 The buy and hold is behind 0.0075. 2. The damages from cycles are amplified by 3X In one cycle (1.15)(.85) = 0.9775 The buy and hold is behind 0.0225. In 3 cycles, (0.9775)(0.9775)(0.9775) = 0.9340 The buy and hold is behind 0.0660. 5% is used here, but the method works for other %.

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