3X ETFs losses

FAS and FAZ are very popular leveraged, 3X, ETFs, the financial ETFs by Direxion.

This week there was an "eclipse" of FAS and FAZ. The "eclipse" was the moment in which both ETFs would have the same nominal price. This occurred at least three times this week, on Monday, around $9.55:



(Please click on images to enlarge).

While both ETFs were at $9.55, today one is at around $9.32, the other one at $9.01, i.e, declines of 5.6% and 2.4%! Both have lost even more value this week since the "eclipse". This is clearly seen on a combined comparison chart, where one is up 18% and the other down 32%:



Keep in mind that FAZ started its life at $120, and FAS at $20! Where has all this money gone?

These ETFs have been traded for 101 days (since inception), given them an average daily loss of 2.5% and 0.8%. If these rates of decline were to continue, FAZ will be trading below $1 in 88 days, and FAS in 280 days.

The combined losses in market valuation on FAS and FAZ is a staggering $4.4B since inception:



This can be seen live at the FAZ-FAS Loss-O-Meter tracking site.


The same fund manager has recently launched four new 3X leveraged ETFs, this time for leveraged income funds. They are certainly tremendous money making vehicles for someone, but certainly not for the mom & pop investors in them.

More on the performance of leveraged ETF options

We discussed the options on leveraged ETFs in an earlier post. Here is another study.

We looked at XLF versus SKF for the period March 3 to March 25. During this period, SKF dropped from around $260 to $90, while XLF went up approximately from $6 to $9.20.

Prices:



Move Percentages:



Picking a price in the middle of the range, SKF 150 puts went up 350%, while XLF 8 calls moved up 800%. The others are similar.

Volumes:

Now, if we look at the volumes, it is clear that XLF has signifcantly higher liquidity. This makes it much easier to buy and sell the options, and also reduces the spreads between bid and ask prices.


Once again, based on this study, it is much preferable to use options on the underlying stock, and not on the leveraged ETF. There is no corresponding leverage on the leveraged options. This, in addition to the immense risks of holding a leveraged ETF which have been discussed here so many times.

Oil and gasoline ETFs: USL, USO, or UGA?

U.S. unleaded gasoline prices has usually seasonal strength from January to the end of April. During this time refiners tend to convert from heating oil used in winter to gasoline used during the summer. Refiners also use this period to perform annual maintenance programs. Gasoline consumption goes up while inventories usually go down. This is why gasoline prices rise during this period, typically this trend lasts until May for retail prices.

In the USA, demand for gasoline is still higher in spite of the recession in the economy. A good chunk of U.S. refineries is old and need to undergo significant maintenance and repairs. If you remember, the hurricane season last year also was quite violent with many hurricanes entering the Gulf of Mexico and causing significant damage to oil and gas installations. Remember Fay, Gustav, Hanna, Ike,, Josephine, Kyle?

In addition, the spread between crude oil and refined product prices ("crack spreads") were below average late in 2008 and have not recovered much in 2009.

If you agree that gasoline prices will outperform oil, then UGA is a better investment vehicle. UGA invests in future gasoline contracts:

"United States Gasoline Fund is an exchange traded security that is designed
to track in percentage terms the movements of gasoline prices. UGA issues units
that may be purchased and sold on the New York Stock Exchange (NYSE) Arca. The
Fund is managed and controlled by its general partner, United States Commodity
Funds LLC. USG pays the General Partner a management fee of 0.60% of net asset
value (NAV) on its average net assets. USG invests in a mixture of listed
gasoline futures contracts, other non-listed gasoline related investments,
Treasuries, cash and cash equivalents. "

Below is a chart comparing USO, USL, and UGA for the last 3 months. Clearly, UGA is the top performer of the three.



(please click to enlarge)

Keep in mind that UGA is a cousin of USO/USL and may suffer from same rollover issues, but at least it offers better odds for someone who wishes to invest in this area.

The dangers of the USO oil ETF

March contracts are up about 8.20%, from $34.62 to $37.70. These contracts expire tomorrow February 20. So what happens today with USO and UCO? Take a look:



USO is up 5.4% The reason is that USO just switched to April contracts.

In the process, by the way, USO sold at the March prices and bought at the April prices. So the same amount of money they had, now own fewer equivalent barrels of oil, about 20% fewer! If oil continues in contango, the same loss will happen in about 4 weeks.

So the poor investors who bought USO got to ride all the losses for the month and today do not rip the rewards.

How about UCO? That is a 2X ETF!

Buyer beware cannot be said loud enough.

Here are the contract calendars (please click to enlarge):




To avoid all these issues (you may have better chances at a casino), you may instead use straddles. We have been doing UCO straddles since UCO was at $12, which was just a few days ago.

Note: these were the 6-6 straddles published yesterday at 9:35AM at http://straddles.nexalogic.com:



This is currently breaking even, let's see how they do by tomorrow.

A look at how well do options work on 3X leveraged ETFs

There are all kinds of leveraged 2X and 3X ETFs on the market these days, most of them with options.

Since a typical option on a regular stock leverages the investment by 100X, do the options on 2X or 3X ETFs represent leverage of 200X or 300X?

We look at the performance of some ETFs this week, particularly Monday January 12.

The following table shows the returns for:

XLF, SKF, UYG (2X financials)

SPY, SDS (2X SPY)

IWM, TNA, TZA (3x small cap Russel 2000)



(please click on image to enlarge)

Some of the individual charts are shown below. The thicker the line, the higher the volume.

Clearly, the performance of the 2X and 3X ETFs is not 200 or 300X. An investor is better off using the 1X underlying, not only for the returns, but also for the much higher volume of traded options.

A look at ETFs and their performance on each weekday

Does the performance of ETFs vary acorsding to the weekday?

It certainly makes a difference. We looked at several indexes and ETFs. It shows the performance on each weekday (Mondays, Tuesdays, Wednesdays, Thursdays, and Fridays). The results are quite interesting as there is quite a difference for a couple of specific days of the week.

The table below shows the performance of the Dow30 (through DIA), SP500 (through SPY), XLF, EWZ (Brazil), XFI (China), and the SP500 itself. The SP500 closely follows the Dow30 as they are highly correlated (see our post on correlation).



(Click on image to enlarge)

If you guessed one of them was Fridays, you are correct. Fridays are very good days to go short, most likely because people do not want to leave money on the table for unexpected bad news on the weekend?). The Dow 30 has gone down on 19 out of 25 Fridays for the first half of this year from January 2 2008 to June 30 2008. The average daily performance on Friday was -0.69%. If you shorted the Dow index at the end of the day on Thursdays and sold it at the end of the following day on Fridays, your cumulative performance would have been -15.95%. In comparison, the total return for the 6 months was -12.21%.


Note also that since the start of the year Brazil gained 10.3%, while its performance on Fridays was a cumulative -7.19%.

As for the best days to go long, it is clearly Mondays, where the Dow has gained 3.88% in spite of what was clearly a bear market in this first half of 2008.

The table also shows the number of days with returns over +0.5% and under -0.5%.

The graph below shows the performance of the Down on each weekday. You can clearly see how people usually sell on Fridays, perhaps afraid of whatever bad news might come on the weekend.



The Excel file used is also available for your viewing pleasure.