Ah…leveraged ETFs. All that beta without all the embarrassment of trying to borrow money from your broker (or cousin) to leverage your returns. Is the regular ETF not volatile enough for you? Buy the 2x version! Still too tepid? Perhaps the 3x version is what you’re looking for.
Unless you’re new to trading though, you’ve probably heard about beta slippage. This is where leveraged ETFs, using a combination of volatility and pesky math, end up losing as compared to their 1x versions over the long haul. Leveraged ETFs aim to provide a 2x or 3x return on an intraday basis as compared to a 1x version (or the index they’re tracking). But, over time, these leveraged returns decay.
For example, let’s take a look at two gold miner ETFs, which track an index of gold miner stocks. We have the plain vanilla version, GDX, and then a triple-leveraged version, NUGT. These are managed by two different investment funds, so we’d expect there to be some day to day discrepancies. Starting at the beginning of 2011, here are the results of a buy and hold approach to each:
In the last post, I compared three systems that traded the same instrument (SPY) in different ways, and also compared the combination of the three systems. Combining those systems reduced risk, which allowed us to increase our position size (either through more cash or using leverage). We could then realize a larger profit for the same amount of risk as we’d experience using just one of the systems.
There is still however a risk of our systems being overly correlated. We might end up throwing two buckets of money at the market, when we thought we were just throwing one bucket. How do we figure that out?
I have this oscillator that comes in handy. The details of the oscillator are unimportant, but I’ve found three different ways to use it as a signal to enter into a short-term (“swing”) trade on SPY. The duration is anywhere between one and twelve days, depending on the system being used, the exit etc.
My problem was this: the systems all trade SPY. Two use mean reversion (one long, the other short), and the third uses long momentum. The systems overlap! How do I determine which systems to trade?
If you are using multiple trading triggers or systems on the same instrument, it’s really important to know how these systems will work together. Is it better to use just one system and discard the others, or should you use all of them and divide up your resources (if necessary) between the systems?
How do you go about comparing these systems in a meaningful way? Here’s what I did.
Which color do you like better? Green or brown? I’m partial to the green curve myself. That green curve comes from writing puts…sort of. Writing puts can be a lower volatility play that makes you money in choppy or flat markets, falls more softly in down markets, and seriously under-performs when the market goes on a tear upward.
Happy new year! It’s that time again, when everyone with a blog does a wrap up of the previous year. Here’s my look-back.
Many of you follow along with the “+/-30% per quarter wider-market breadth indicator”. Which is too much of a mouthful, so I’ve humbly named it after myself instead. I wanted to provide an update since I’ve been tracking it for awhile.