2x and 3x leveraged ETF's for long term investments, good idea?

[BillSimmons]

2x and 3x leveraged ETF's for long term investments, such as an IRA, good idea? Or is that not the right way to go?

 

[LuKOs.ro]

Depends on what they invest in. Remember that at 2x a 50% and at 3x a 33% loss wipes the IRA account. Do you want to take that risk ? A leveraged ETF of an asset with very low volatility may seem a good idea (even though low volatility assets are getting rarer and rarer).

How about shorting 30y US T-bills for a long term strategy ?

 

[new_trader]

2x and 3x leveraged ETF's for long term investments, such as an IRA, good idea? Or is that not the right way to go?

IMO: No, they are not a good idea for long term investing. For long term investments I would stick to ‘plain vanilla’ physical replicating ETF’s. I would also check the PDS to ensure they do not participate in securities lending or leasing and that their derivative exposure is kept to an absolute minimum.

 

[TheBramble]

I didn't realise you could extend credit to your own IRA account.

 

[Rhody Trader]

Leveraged ETFs are designed to double/triple the daily return of the underlying market. As such, they are rebalanced daily. This creates tracking problems over longer time periods, so they won't necessarily do what you think they'll do given the performance of the underlying market in that time frame.

 

[new_trader]

Leveraged ETFs are designed to double/triple the daily return of the underlying market. As such, they are rebalanced daily. This creates tracking problems over longer time periods, so they won't necessarily do what you think they'll do given the performance of the underlying market in that time frame.

The tracking error would be the least of my worries. There are enough conspiracy theories going around the internet about the safety and structure of physical ETF’s to create an element of doubt. All the leveraged ETF’s that I am aware of are synthetic or swap based and these have a real element of doubt which is counterparty risk.

I know that some of the latest generation ETF’s have multiple counterparties to reduce risk but there are questions raised about the quality of collateral that authorised participants are using when creating ETF units.

 

[Sidekicker]

2x and 3x leveraged ETF's for long term investments, such as an IRA, good idea? Or is that not the right way to go?

When you say long term what do you mean? Buy and hold? Then no, any leveraged ETF will gradually deplete your income due to the funding costs and the way they calculate returns.

A 3 x is only good for day trading.
A 2x - you can hold for a few weeks or months and it shouldn't matter too much.

The daily rebalancing is the problem...look at the examples here: The Riskiest ETFs on Earth - 3X Sector ETF Short/Long

 

[BillSimmons]

Thanks! Looks like regular ETF's are better for buy an hold.