Understanding Decay in Leveraged ETFs
There seems to be some lack of understanding about decay in the leveraged/inverse ETFs that happens because of chop up and chop down. SRS, known as widow-maker not without a reason is my example of choice to illustrate this point. Today (May 22, 2009), IYR closed at $31.71. In past 6 months, I have identified three other data points for IYR when IYR was near or about $31.71:
- Point1: Nov 11, 2008 – IYR’s low of the day
- Point 2: Dec 11, 2008 – IYR’s close
- Point 3: Feb 3, 2009 IYR’s open
- Point 4: May 22, 2009 – IYR close
These points have been shaded yellow in the IYR chart. The SRS chart shows the value of SRS at these 4 points.
- Point 1: $151.20
- Point 2: $88.43
- Point 3: $57.72
- Point 4: $22.73
You can see that even though from Nov 11, 2008 to May 22, 2009, the underlying IYR has been unchanged (disregarding the moves up and down in this period)… SRS has gone from $151.20 to $22.73 – OUCH OUCH.. So, here’s the message – DO NOT HOLD leveraged ETFs for long period. If they go against you, GET THE HELL OUT.
