Double ETF’s and Triple ETF’s - Watch the Time Value Decay

Double ETF’s and Triple ETF’s are attractive because of the increased return that you can get if you are in the right sector at the right time. But this added leverage comes at a cost. Here’s a look at how this added leverage will work in a variety of price movements.

Double and Triple ETFs Decay Their Value Faster - By Design
By Gail Elaine Southard

ETF leveraged investments, over time, suffer the inherent inequality between the same percent up, and then down, relentlessly eroding the value. Every retailer knows this lesson. Let’s simplify the idea.

On a $1000-ticket item a 40% mark-up moves the price to $1400, yet when later put on sale a 40% discount moves the price to $840. An equal percent up and down yet the retailer is at a $160 loss on his original $1000. Many a small business has folded because of not attending to this mathematical truth in their financial planning.

Over and over, this, in principle, is what is happening. With doubled and tripled percent moves, this disparity is greatly magnified. So we, in my amateur’s opinion, must treat all double and triple ETF’s as if we are paying a premium on a wasting asset, because for all practical purposes it is decaying, somewhat like an option would decay. This happens regardless of whether this is a double up ETF or double down ETF, a triple up ETF or a triple down ETF, because the effect comes from the function of mathematics, not what market item is being measured. However, the daily frequency of computing the new value does matter.

Want proof? Below is 20%, oscillating, to demonstrate what would happen to a small investor. The same thing is happening, yet less obviously, when the up and down percents are lesser and inconsistent.

By back checking your date of purchase with the underlying price of the market item/bundle being tracked, and comparing to your dollar value now - when it touches that same price point, you can witness the erosion in value of the ETF. A huge up day can of course show a good gain, yet the erosion sets in again.

The bigger the percent swing, the faster the dollar-value erodes. A triple erodes even faster than a double, a double faster than a single. So in a sense the triple exacts a higher premium. Notice that at 20% - $1000 up and down is a $40 loss, where at 40% - $1000 up and down was a $160 loss. 20% doubled is 40%, $40 doubled is $80, yet the loss on 40% up and down is $160, or 4 times the loss ($40 x 4). That gives a rough sense of the mathematical impact on triple versus double ETFs.

(my example is rounded for reporting convenience)
$1000 invested goes 20% up ($1000 base times 1.2 [120%] )

then goes 20% down (new base times .8 [80%] ) repeating:

$1000 to start: up $1200, down $960, // up 1152, down 922, // up 1106, down 885, // up 1062, down 849, // up 1019, down 815, // up 978, down 783, // up 939, down 751, // up 902, down 721, // up 866, down 693, // up 831, down 665, // up 798, down 638, // up 766, down 613, // up735, down 588, // up 706, down 565, // etc.

Just 14 up and down cycles, ending on $565/$1000 = 56.5 % remaining or a 43.5% loss. Of course an even 20% up and 20% down, repeating, will never happen. But, this proves that Down is the Prevailing Trend of every double and triple ETF.

Sometimes the underlying market index or sector goes up more than one day, or down more than one day, yet any stock chart can let you count the number of zigs and zags up and down. Please notice that with this the volume is also irrelevant. A small volume day moves the percent up or down as easily as a large volume day. Multiple days up, then multiple days down does slow this trend down some, yet over two or three months it does happen.

$1000 down 50% is $500, yet for $500 to become $1000 again it needs to go back up 100%.

Sometimes if the item goes up 20% and down 10% and up 20% and down 10% of course you do gain, but it is like bucking the tide. Like in Las Vegas, the odds are relentlessly with the house. The designers of these instruments, in my opinion, in all likelihood knew this going in.

These high leveraged ETFs were never meant to be for investing, they are for short term trading only, for the reason I just demonstrated. Do the math. Math can disprove an obvious conclusion assumed even by many investment advisors. When I finally did, I realized the importance of sharing my hard earned knowlege.

I made the costly mistake of thinking I could hold them long term. Now I understand that the longer I wait, the further in the distance my break-even point is likely to move. I will start fresh, with a clearer understanding of how these products move.

Do treat these ETF’s like some pros, like Jim Cramer, are now counseling, as short term trading tools. Take your profits sooner rather than later. Then, at a better entry point, get back in and do it again. Mathematically, these are definitely NOT long term investment instruments. Yet, you can make sweet money with them. So be aware. & Tell a friend.

: Elaine Southard is a fairly new investor with ETFs, yet with a background in business math. Her main interests are varied, from just graduating Bible college, to an interest in adult stem cells, because they work wonders and they don’t have the ethical problems of embryonic stem cells. You are invited to learn more about that at She would appreciate knowing if this article has helped you. She’s reached at where she contributes articles for her son’s website, Long ago she used to entertain her young son by taking him roller skating. Now, it’s his business. A simple quick visit will help his site grow.

Article Source:—By-Design&id=2095978

Filed under ETFs - Exchange Traded Funds

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