Posted Sunday, June 7, 2009 @ 10:58 pm by Dr. Wish

Why search for individual stocks when we can ride the ultra ETF’s?

GMI

4/6

GMI-R

8/10

What is the GMI?
 

WORDEN T2108

86%

It is rare that I complete an analysis whose findings totally surprise me, but take a look at this one.  A lot of the pundits claim that the ultra ETF’s,  leveraged baskets of stocks that try to double or triple the performance of their underlying indexes or sectors, fail to achieve their goals.  So, just to satisfy my curiosity, I compared the performance of the primary index ETF’s, SPY (S&P500) , DIA (Dow 30)  and QQQQ (Nasdaq 100) with those of the leveraged ETF’s.  There were exact comparisons for these indexes for  the 2X ETF’s, but I had to choose other, more general  indexes for the 3X ETF’s. The results blew me away…

The 2X and 3X Ultra ETF’s absolutely outperformed the standard index ETF’s in the period since the March bottom.  For example, while the QQQQ (Nasdax 100) index ETF rose 42.9% in this period, the QLD (2x QQQQ ETF) rose 99.2% and the TYH (technology bull 3X ETF) rose 179.4%.  In comparison, the top five individual stock performers in the Nasdaq 100 stocks rose from 138.8% (JAVA) to 180.57% ( STX).  In fact, only 16 stocks (16%) in the Nasdaq100 (and 23% in the S&P500) rose 80% or more.  So, the choice before us is to  search for the needle in the ultraetfperohaystack individual stock that might do really well in a bull rise, or to buy one of these 2X or 3X ultra long ETF’s and ride a basket of stocks with a lot more diversification and probably less risk than owning individual stocks.  The key is to discern the trend accurately and to then ride the ultra ETF with the most potential for following that trend.  Some ultra ETF’s also trade options…..

And the general market trend remains up, as measured by my GMI. gmi0605 One day last week, we even registered 54 new highs in my universe of 4,000 stocks, the most in a single day since last September.  On Friday, there were 27 new highs and 7 new lows.  And now, 75% of the Nasdaq 100 stocks have their MACD above their signal lines.  With an up-trend like this, I am beginning to reinvest my university pension money in the growth mutual fund.  I am also looking to phase into one of the ultra  ETF’s that I discussed above, in my trading IRA.  If this up-trend has real legs, there is plenty of time for me to wade into the market.  If not, I will get out again. The key is to go in slowly and only add more money if the ETF climbs above my original purchase price.  I never average down.


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Comments ( 8 )

You have a bull by its tail with your analysis. And with a 3 month comparison, you may be holding the end of the tail. Other studies I have seen said these devices under perform for the longer term.

Illini added these pithy words on Mon, 6-8-09 at 12:42 am

Thanks for posting this. I remember in your stock class, you said that QLD outperformed a huge majority of stocks during the Fall 06 bull market rally. I think this is a good strategy for investors that are willing to take the time to study the market’s trend, but don’t have the time to spend looking at individual stocks.

Shawn M added these pithy words on Mon, 6-8-09 at 10:12 am

If long-term under performance be accurate, a successful timing model ala Wishing Wealth or ??? would increase the net results in favor of the 2X/3X outperformance. I do wonder if the ratio would hold in a normalized market vs. the hugh jump seen since the March low? And how to determine the ultra ETF’s with the most potential?

bill kloppenburg added these pithy words on Mon, 6-8-09 at 10:14 am

Here’s a good article about leveraged ETF’s.
http://blog.quantumfading.com/2009/06/01/leveraged-decay/

Jim Tamarelli added these pithy words on Mon, 6-8-09 at 8:06 pm

dr wish, im glad your back and blogging again! is it true that the maximum annual contribution into a roth ira is $5000? i just opened an account at thinkorswim

Jason added these pithy words on Mon, 6-8-09 at 8:32 pm

RE: Jason. Yes that is the maximum amount unless you are close to retirement age (then it’s $1000 more).

Shawn M added these pithy words on Tue, 6-9-09 at 10:05 am

Another note about the long term performances of these ETFs: these leveraged ETFs do very well during steady trends, but during choppy market conditions you can end up with the bullish and bearish ultra ETFs both doing worse than the underlying index. For example, from the period of January to April, 2009 the 3x bull AND 3x bear financial ETFs were BOTH down over 60%! (link: http://bespokeinvest.typepad.com/bespoke/2009/04/direxion-3x-financial-etfs-go-certifiably-crazy.html )

Shawn M added these pithy words on Mon, 8-3-09 at 10:13 pm

Dr. Wish, all leveraged ETFs are designed to ‘outperform’ in this way. They are reset every trading day, and replicate the underlying index 200% or 300% on a daily basis. If you do the math this way, you’ll see that it adds up to your calculations. On the way down however, watch out, the math works against you (larger drawdowns than may be superficially apparent).

Verdacity added these pithy words on Fri, 5-7-10 at 10:10 pm

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