Tuesday, January 20, 2009

A Winning 2X and 3X ETF Long Term Strategy


In theory, investors who buy both the long (bull) and the short (bear) version of leveraged ETFs should make a healthy profit in the long term. This is because of the power of compounding. Imagine a $1,000 investment in both bull and bear ETFs, and a 1% return for each of two days(either +1% both days, or -1% both days). In the case of +1%, each ETF will return +2% or -2% in each day:

Original investment: $1,000.00 + $1,000.00 = $2,000.00

After day one:

  • bull ETF: $1,000+2% = $1,020.00
  • bear ETF: $1,000-2% = $980.00
  • total: $2,000.00

After day two:
  • bull ETF: $1,020+2% = $1,040.00
  • bear ETF: $980-2% = $960.40
  • Total: $2,000.40

After 10 days of this, the total would be $2,031.85, for a healthy return of +1.6%.

After 60 days, this chart shows the total $ amounts there would be in each ETF. At the end of the period there are $3,527.57 in total:

The ROI in this case is +76%. The reason for this is simple, the gains on the winning side are compounded giving higher dollar amounts every day, while the dollar losses on the losing side become smaller and smaller.

This is why it is is important to look at the "paired performance", the performance of both bull and bear ETFs bought as a paired trade, to see what really happens in the long term. The paired performances are reproduced below for all the 2X and 3X ETFs mentioned in our previous post.

Symbol Paired Perf.
HNU+HND 14.30%
HOU + HOD 41.96%
HGU + HGD -65.88%
HEU + HED -44.58%
HBU + HBD -17.40%
HMU + HMD -56.54%
HTU + HTD 5.10%
HJU + HJD -50.03%
HAU + HAD 23.53%
HDU + HDD 4.18%
HQU + HQD 8.20%
HSU + HSD -1.10%
HXU + HXD -4.23%
HFU + HFD -1.58%
SSO + SDS -27.08%
UYG + SKF 13.39%
UWM + TWM -37.42%
DDM + DXD -39.05%
TNA + TZA -30.54%
ERX + ERY -38.63%
FAS + FAZ -37.15%
BGU + BGD -18.43%
DZK + DPK -0.54%
EDC + EDZ -2.16%
TYH + TYP -3.28%
DXO + DTO 255.06%
UCD + CMD -2.10%
UCO + SCO -6.32%
ULE + EUO -0.74%
YCL + YCS 0.00%

In general, what happens in the long term is very poor performance. The vast majority of paired trades is a loser. The only exceptions are the recent oil ETFs because oil has been crashing lately. If history is an example, any long term investors should be very wise to cash out. Leaving money long in these ETFs is a recipe for losses.

Here are some charts that show the returns for an investor who put $10,000.00 in each bull and bear ETF.


(please click on images to enlarge)


We also take a look at the winning DXO-DTO trade. Since this ETFs were created, oil has come crashing hard from $140 to $35 or so, so any bull or long ETF should show very significant gains of roughly 300%.

It will be very interesting to see what will happen once oil starts to recover.


Given the very poor performance of any of these paired trades held for longer term, a winning strategy is to short the paired trade. In this strategy, the investor short sells an equal amount of dollars of both the bull and the bear ETFs.

Below is the one-year performance for shorting paired trades for all ETFs that have been trading for longer than 10 months.

  • 1. Shorting Horizon ETFs: average return of +18.51%

Note that this actually includes the oil and natural gas ETFs.

(-18.51% is the performance if you had gone long)

  • 2. Shorting ProShares ETFs: average return of +22.54%

Note that this includes the financial ETFs, which have also crashed lately.

  • 3. Shorting Direxion ETFs: average return of 31.19%.

Finally, we take a look at the 3X ETFs. These have only been trading for a few months, but every single pair is a big loss:

Therefore the strategy of shorting pair of ETFs has returned, as measured by profit over the initial proceeds of the short sale:

  • Shorting Horizon ETFs: +18.51% (1y)
  • Shorting ProShares ETFs: +22.54% (1y)
  • Shorting Direxion ETFs: +31.19% (3 months)


  • Effects of interest earned with the investment of the shorting funds or of paying dividends is not included.
  • Note: Direxion funds performance is since their inception in November 2008.
  • Past performance is not necessarily an indication of future performance

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