They're extremely popular too. Yet despite their popularity, the leveraged and inverse ETF space is surrounded by controversy. Many believe these products should be outright banned due to their volatile nature. Some even consider them tools for gamblers, as they point to the tremendous losses that some of these products have seen. To be sure, the unsavory reputation that leveraged and inverse ETFs have received isn't completely unwarranted. But that doesn't mean they haven't done exactly what they were designed to do, which is provide 3x-daily leveraged exposure to the indexes they track.
This is a bet that oil and gold will go up. Over longer-term periods, the pattern of returns between the index and the products can deviate significantly due to the effects of daily rebalancing. That translates to a two-day loss of 5. For ETPs tied to volatile flat-to-down-trending areas of the market—such as oil and other commodities—this rebalancing effect has a detrimental effect on returns over time.
For very-short-term traders, that's not a concern. They can use these ETPs to trade in and out of the market in an attempt to capture quick gains that will be close to 3x the index.
It's the longer-term and retail traders—who often don't know how these products work—who end up disappointed or devastated. Does that mean these products should be banned?
In any case, more investor education is needed, particularly for retail investors who are heavy users of leveraged and inverse ETPs. All that said, it's not possible to make the blanket statement that all geared products perform poorly over longer time horizons.
For areas of the market that are trending higher, the daily rebalancing effect can have a decidedly positive effect on returns. On day five, the index will be trading at In this case, the geared product will have delivered almost 4.
Of course, no index or asset goes straight up without at least some volatility. But this example shows that certain leveraged products can be viable to hold over longer-term periods. Of course, just because SPXL has performed well during the last several years doesn't mean it will do so going forward.
That makes them great market-timing tools for aggressive investors with time horizons up to several years, but they're by no means buy-and-hold-forever products. View the discussion thread. Skip to main content. Leveraged and inverse ETFs are prolific. Out of the more than 1, U. Positive Compounding All that said, it's not possible to make the blanket statement that all geared products perform poorly over longer time horizons. United Arab Emirates Vietnam.More...