Leveraged exchange-traded funds are, in theory, an excellent way to harness that conviction you have about the future direction of a particular index. Some of these funds will reward investors with two-times or even three-times the daily moves of the underlying investment – so if the S&P 500 rises 1 per cent, you could gain 3 per cent. In theory.
In practice, these ETFs have received a lot of criticism recently because investors have realized that the actual returns, on a longer-term basis, don’t come close to reflecting the moves of the underlying indexes. Birinyi Associates listed a number of fine examples on their web site.
The Ultra S&P 500 ProShares, which aims to give investors twice the daily performance of the S&P 500, has fallen 66 percent since June 21, 2006. However, its opposite – the ETF that gives investors twice the inverse performance of the S&P 500 – has risen just 12 per cent. In other words, if you had made an astute bet against U.S. blue-chip stocks during one of the greatest equity meltdowns in history, your return wouldn’t have beaten the dividend on a high-yielding tobacco stock.
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