This post has been selected as an answer to the original posters question
It all depends on your expectations:
If you expect to simply reproduce x-to-1 the short-term (or worse: longer-term) movements of the underlying
without having to put up much capital/margin, then you will be deeply disappointed, esp in volatile environments.
If you expect a derivative asset class of its own, you have a better start.
The - at best: correlated - movements of the underlying won't help you much.
Correlations to the underlying change heavily depending on e.g. volatility and time frame.
Lev ETF volume/market depth is another issue if your trading depends on intraday momentum,
i.e. tons of slippage for market orders or simply no fills for limit orders; as you choose.
So first check the pricing rules and auctioning of the leveraged ETFs that you want to trade (prospectus). Backtest your method on these ETFs to find out if your method is profitable.
If it is - give it a try.
Thank you for the information regarding slippage. This being the case, therefore, would you conclude that it would not be a possibility for a trader to do program trading with a leveraged ETF? Even a hugely capitalized one. Just trying to understand the nature of the animal here with an ETF.
I have never tried program trading. I am just investigating the viability of program trading. On that note, what are your thoughts as to program trading in general?
Regarding slippage with an ETF. I am confused. With an ETF must you have both a buyer and a seller as you would have with a stock or commodity? Regardless of how an ETF does their accounting, The ETF still has to match somehow the underlying, right?, point for point. So you wouldn't be getting slippage on a bid/ask spread between a buyer and seller. Would this be slippage because they make you wait until your order can be filled and during this wait, the underlying is changing price?
Sure, just like with any other asset, you need a buyer and a seller to close a trade.
The point is not the accounting, but more the realization of NAV. Theoretically, you
can have many possibilities of arbitrage during the day in the lev ETF, but practically
you won't be able to use it because there is no market depth.
This lack of interest means that you will have many empty slots in the order book.
That's what causes the slippage, because a market order will be filled far from the
last trade (in contrast to more liquid assets like e.g. SPY). Limit orders simply won't
be filled until they hit the spread (because of a relatively strong move in the underlying).
Hugely capitalized traders "normally" won't use lev ETFs because of these deficits.
How would they be able to unwind some 10000 shares of the lev ETF when this costs
them the first 50 ticks of the order book? How would you unwind a position outside of RTH?
Instead, well capitalized traders will prefer liquid assets like futures whenever possible.
Last edited by choke35; March 15th, 2015 at 07:14 PM.
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... To understand what is beta-slippage, imagine a very volatile asset that goes up 25% one day and down 20% the day after. A perfect double leveraged ETF goes up 50% the first day and down 40% the second day. On the close of the second day, the underlying asset is back to its initial price:
(1 + 0.25) x (1 - 0.2) = 1
And the perfect leveraged ETF?
(1 + 0.5) x (1 - 0.4) = 0.9
Nothing has changed for the underlying asset, and 10% of your money has disappeared. Beta-slippage is not a scam. It is the normal mathematical behavior of a leveraged and rebalanced portfolio... more ...
Of course if your day trading it may not have the same effect.
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A typical example of all these effects (volatility, high spread per trade, slippage)
is UWTI which is constantly among the lev ETFs with the highest volume during
the last weeks.
The decay effects shred NAV. Only good news is that these effects become more and more
insignificant in terms of $ as the rest would approach 0 asymptotically.
Only retail bus people could be so benighted to pay 1-2 ct of spread per execution on a
Take a look at market depth during RTH and count, how much more one would lose as a
percentage when trying to buy/sell 10000$ worth of UWTI. (A comparison during ETH is
biased; cumulative visible market depth at the moment is below 2000 shares on both sides
of the order book although UWTI is open since about 1 hour ...)
One last factor that also applies for many other assets but is important for UWTI today:
UWTI currently has short-sale restrictions (at least until March 17). So even if you understood
the complete mechanics you wouldn't be allowed to short this lev ETF now. You can only sell
what you have or join a very warm welcome on the buy side
I've been (automated) trading exclusively leveraged ETF over the last 4 years successfully. Obviously you need to make sure to pick a combination of ETFs that have high volume, high volatility (and ideally low corrolation). Personnaly, I trade UVXY, JNUG, RUSS and UGAZ and their inverse (instead of shorting).
Also to the comment about slippage, with high volume ETFs, the spread is usually quite thin. I've also run tests over a couple of months to compare market orders versus limit orders and when you consider the fees rebate and the fill price, the dynamic limit orders are better than market orders and as such is the only thing I now use.
Last edited by Virtuose1; March 16th, 2015 at 08:27 PM.
Reason: Additional details
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Good job overall, if it works for you that way, but you must have really massive rebates
to regard 1-2ct spread in penny ETFs like UGAZ as thin.
By trading the inverse you avoid short-sale restrictions, but it comes with a price.
You are now on the buy side for any of your ETFs which means that you are always
a counterpart of the respective issuers in any of your trades.
Personally, I wouldn't like being the permanent voluntary hedge of an issuer, but
it's quite common in lev ETFs. That's why many euphemistically call them a
One useful technique is to use a combination of ETFs and Futures to achieve granularity in position sizing.
For instance, if your money management strategy calls for 1.3 contracts, with futures you're forced to round that number down. This is far from ideal when it comes to producing a smooth equity curve. If an ETF is worth 0.1 of the future that tracks the equivalent underlying, then you'd buy 1 futures contract and 3 shares of the ETF. The effect of this perfectly realized position sizing can be significant.
For most daytrading strategies I would tend towards futures. The associated costs and the regulatory restrictions are minimal - they're really built well for short term trading, even though it wasn't what they were designed for!
I'm quite surprised that we aren't seeing even more highly leveraged ETF products launched - there's a definite gap between the x3 leverage of an ETF and the x50 plus leverage of most futures . . .
Hope that helps,
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