The Canadian Foundation for Advancement of Investor Rights (FAIR) has published a paper titled “Heads You Lose, Tails You Lose: The Strange Case of Leveraged ETFs”. You can download the paper here. The paper is generally well written and argues that Horizons Beta Pro doesn’t provide fair warning to investors about the dangers of holding leveraged ETF’s for more than a few days. A number of examples are given of how pairs of both bull and bear leveraged ETF’s lost money over the same time period. Nothing new there. Those of us who are educated about leveraged ETF’s are aware of this issue. As is correctly noted in the paper, in order to make money with leveraged ETF’s you have to get the entry and exit timing right and you have to hold them over a period of time when the underlying market makes a consistent directional move.
The folks at FAIR argue that the Horizons Beta Pro prospectus does not provide a sufficient disclosure of the risks associated with holding leveraged ETF’s for more than a few days. FAIR is pushing Horizons Beta Pro to modify its prospectus to state that leveraged ETF’s are not appropriate for longer term investors. Paradoxically, in this paper on page 4 the author states that “most investors don’t read the prospectus …”. One has to wonder what the point is of arguing for a better disclosure of risk in the prospectus while at the same time acknowledging that few people bother to read the prospectus in the first place.
I have no problem with the paper’s statements that returns from leveraged ETF’s are dependent on timing, volatility and consistency of market direction. I do, however, have a problem with the notion that leveraged ETF’s are not meant to be held for more than a few days. Let me give an example. From its inception on 08/03/06 to 05/22/09, my QLD/Cash model had a gain of 135.4% whereas my QQQQ/Cash model had a gain of 61.3% over the same period. Both models use the same entry and exit dates and the underlying is the Nasdaq. QLD is a leveraged ETF whereas QQQQ is a plain vanilla ETF. If you can handle the volatility, I would argue that not using leveraged ETF’s as I do can be disastrous to the value of your portfolio.
Below are performance tables for my leveraged ETF models.
Canadian 2X ETF Models
US 2X ETF Models
FJP
