Are You Caught In A Leveraged ETF?

October 19, 2016
Elliot Wave Technical Analyst & author @ Elliott Wave Trader

investment

Despite my many warnings against inappropriately using these leveraged vehicles, many investors still view them as an “investment.”

Too many people will place their money into these triple leveraged funds expecting that they are going to supercharge their returns.  But, these funds are not meant for buy-and-hold investors.  You see, these funds are generally designed to drop in price, which is why they have all had many reverse splits through the years.  Yes, you heard me right.  They are designed to lose money over the long term. 

Yet, I see irresponsible and reckless “analysts” suggesting these leveraged ETF’s as buy and hold investment vehicles.  Folks, if you are following an “analyst” that makes such a suggestion to you, don’t walk to the exit . . . RUN!!!  You can avoid a lot of pain that way.

I have said this so many times in my own Trading Room at Elliottwavetrade.net, in addition to writing about it in public articles, but it still needs repeating:

Any leveraged ETF is purely a trading vehicle and should never be used as an investment vehicle. And, yes, I will repeat the main point: Leveraged ETF's should never be used as an investment vehicle.

Anyone who really understands what they are doing in the investment world understands how toxic these vehicles are to “buy and hold.”   I don’t have to re-invent the wheel when writing about the details of these funds, so I will just suggest you read a well written and simple article by Sammy Pollack on the issue:

http://seekingalpha.com/article/309261-the-dangers-of-leveraged-etfs

Let me give you a simple real world example I have seen recently.  An “analyst” recently suggested a “buy-and-hold” on JNUG (a 3X junior miner’s ETF) when price moved up in a rally to the 25.50 region in early September.  Since that time, JNUG has dropped to as low as 9.50, and may not yet be done.  And, yes, those that followed this “analyst” have held the entire way down because this analyst kept promising them that it would turn back up.   And, while it continued to drop, the “analyst” blamed the losses on “manipulation” rather than on his short sightedness and recklessness, especially since he advised against using stops because of his “fear of the manipulators.” 

For those counting, that is 63% draw down in one month that has been endured by the followers of this “analyst” due to the “analysts” irrational fears, and his clear lack of understanding of the market.  You see, not only are moves to the upside compounded, but moves to the downside are compounded even more so. 

What is even worse is that should the main underlying index which JNUG tracks move back to the level it struck in early September, JNUG will still not be even close to the 25.50 entry region.  In fact, it will not likely even break over 20 at that point due to the manner in which the movements in the fund are calculated. 

So, I would like to reiterate that these funds are trading vehicles and not investment vehicles.  Anyone who suggests to you otherwise is nothing less than uninformed, reckless, and dangerous. They are usually more concerned about recklessly attempting to boost their marketable “profitability percentage” than they are about protecting your hard earned money. 

So, I beseech of each and every one of you to please learn about how these leveraged ETF's work before you consider placing any of your hard earned money in them for anything more than a simple short-term trade.  Again, buyer beware.

 Avi Gilburt, Esq.

www.elliottwavetrader.net

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Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net, a live Trading Room featuring his intraday market analysis (including emini S&P500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education. You can contact Avi at: info@elliottwavetrader.net.

The volume of all the gold ever mined can occupy a cube 63 feet on each side.

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