3x ETF gains and decays: the bulls, the bears, ohh, my!

Greetings,

A few comments were made last week, in the UserNotes section, about the decay factor, of leveraged ETFs. I have, in the past, run some numbers on those, and I thought, in the absence of anything interesting happening today in the market to write about:

why not do a little bit of charting, to provide a visual reference to what we’re talking about.

Before I go on: I realized, just doing this now, that in the past I was looking at the wrong index, for doing FAS/FAZ calc! I was looking at the Russell 1000, not the Russell 1000 Financial Services index, so that pretty much invalidates whatever numbers I has posted in the past for FAS/FAZ decay. The values contained in here are correct (I hope, he says 🙂 ).

I have only done this for the TNA/TZA and FAS/FAZ pairs, as these seem to be the most popular (just based on what I see, in UserNotes). I did also want to run these for EDC/EDZ, since EDZ is a popular hedge, but I couldn’t find the underlying index in freestockcharts.com (I’ve emailed their support people, so I might end up adding this later on, if they reply in time, and point me in the right direction).

To “study” decay I picked three points, about a month apart in the recent past, where the values of the index were (almost) the same (these could be open, close, low, or high daily values). I then looked at, and plotted the corresponding ETF values, together with the percentage gain/loss. In addition to this, I also included the values and the percentage gains (both index and ETF) for the Sept melt up – just as an FYI. This is just a single data point, so I wouldn’t try this just yet, but it APPEARS, just from looking at the past month, and just at TNA/TZA and FAS/FAZ that the bull ones increase more during a melt up than the bears decrease. If you’re thinking “I smell an arbitrage opportunity,” well, I’ll need to look into other past mono-direction market periods, and see how everything behaved then to get some kind of confirmation that this is not a fluke.

Here are the charts, with the values:

As mentioned before, it seems that the bear ETFs decay much faster than the bull ones (2-3x faster) – just something to keep in mind if your strategy includes the thought of “well, if it moves against me, I’ll just hold it until it recovers.” Yes, I admit – I still think that, sometimes, it’s a hard habit to break! Holding it for few days or couple of weeks, not a problem. Few months? Well, you’d need to count on the market moving quite a bit higher (or lower, as the case might be) than where you bought the ETF, to break even…

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