|Naive -3x Return||30%||30%|
|Hypothetical ETF-3x Returns||35%||26%|
Hypothetical 1x levels. Hypothetical ETF returns are calculated based on daily resetting -3x exposure.
Rebalance To Get Your Desired Multiple
Traders can rebalance their positions to lessen the impact of this path dependency.
To clarify, the ETFs reset their exposure daily to their target (3x) multiple. But as an investor, you need to rebalance your exposure to the ETF to maintain that 3x multiple over time by buying or selling incremental amounts to true-up your exposure. To be clear, that means buying more shares of the ETF if the performance is below the 3x multiple or selling if it's above.
The takeaway: Leveraged and inverse ETFs are powerful tactical tools. Traders holding the funds for longer than a day without rebalancing their positions can benefit or suffer from the path dependency, unlike a position in an unleveraged stock or bond ETF.
Again, the solution is to rebalance your position in the ETF to maintain the desired exposure.
At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Britt at [email protected] or follow him on Twitter @PaulBritt_ETF.