A Perfect Scenario For Leveraged ETFs
There have been many negative articles written the past couple years concerning leveraged ETFs.
Since the leverage is gained by using futures, options or other financial derivatives there is a constant erosion of time value along with issues caused by rolling futures contracts forward.
However, when you get big directional moves like the one we are currently seeing in precious metals it's hard to beat the performance of these products.
The move in the precious metals that began in late August has been the most powerful, sustained move the markets have seen in years.
This is especially true for the silver market which has been plagued by very large short positions in the comex silver futures.
Many market watchers have claimed that these short positions have been an attempt to manipulate the price of silver and now the participants are trying to exit this position.
This short covering combined with never-ending fed liquidity and a declining dollar has lead to the perfect storm for higher silver prices.
Seeing the break out last August I decided to buy silver.
Normally I trade silver futures but with the higher degree of volatility I decided to buy the Global X Silver Miners ETF (SIL) instead and avoid the excess leverage.
In hind sight, I wish I would've bought silver futures but SIL turned out to be alright compared to buying the plain Silver ETF slv.
The price of silver as reflected by SLV is up about 45% since that day whereas SIL is up a bit over 50%.
In addition, the miners tend to increase their out-performance toward the end of the bull market.
However, an even better move would've been to purchase the Double Silver ETF - AGQ which also crossed my mind at the time.
Had I purchased that ETF instead I would've had over twice the gain of SIL or SLV at about 105%! However I didn't expect such a rare event as I had been waiting for this for many months.
The historical performance of leveraged commodity ETFs in general has been quite dismal to date.
In fact, if you had purchased the Double Gold ETN - DGP at it's inception you would've underperformed GLD almost the entire time (2 1/2 years) until the strong rally these last 8 weeks.
So even though there are rare occasions like this where leveraged ETF products squash the competition, most of the time you are better off without the leverage.
They remain a product best suited for short term traders, not long term investors.
Since the leverage is gained by using futures, options or other financial derivatives there is a constant erosion of time value along with issues caused by rolling futures contracts forward.
However, when you get big directional moves like the one we are currently seeing in precious metals it's hard to beat the performance of these products.
The move in the precious metals that began in late August has been the most powerful, sustained move the markets have seen in years.
This is especially true for the silver market which has been plagued by very large short positions in the comex silver futures.
Many market watchers have claimed that these short positions have been an attempt to manipulate the price of silver and now the participants are trying to exit this position.
This short covering combined with never-ending fed liquidity and a declining dollar has lead to the perfect storm for higher silver prices.
Seeing the break out last August I decided to buy silver.
Normally I trade silver futures but with the higher degree of volatility I decided to buy the Global X Silver Miners ETF (SIL) instead and avoid the excess leverage.
In hind sight, I wish I would've bought silver futures but SIL turned out to be alright compared to buying the plain Silver ETF slv.
The price of silver as reflected by SLV is up about 45% since that day whereas SIL is up a bit over 50%.
In addition, the miners tend to increase their out-performance toward the end of the bull market.
However, an even better move would've been to purchase the Double Silver ETF - AGQ which also crossed my mind at the time.
Had I purchased that ETF instead I would've had over twice the gain of SIL or SLV at about 105%! However I didn't expect such a rare event as I had been waiting for this for many months.
The historical performance of leveraged commodity ETFs in general has been quite dismal to date.
In fact, if you had purchased the Double Gold ETN - DGP at it's inception you would've underperformed GLD almost the entire time (2 1/2 years) until the strong rally these last 8 weeks.
So even though there are rare occasions like this where leveraged ETF products squash the competition, most of the time you are better off without the leverage.
They remain a product best suited for short term traders, not long term investors.
Source...