Can you beat the market by investing in double long ETFs? [duplicate]
If the index goes up every single day during your investment, you would indeed be better off with 2x ETFs, assuming no tracking errors. However, this is basically never the case. Indexes fluctuate up and down. And the problem is, with these sorts of ETFs, you double your win on the upside but your downside is more than double. If an index goes up 10% one day and down 10% the next, you lose 1% of the value of your investment (1.1 * 0.9). If you are using 2x ETFs, you lose 4% of the value of your investment (1.2 * 0.8), not 2%. If you are using 3x ETFs, you lose 9% of the value of your investment (1.3 * 0.7), not 3%. So, if the index will continue to rise during your holding period, yes, you are better off with these 2x or 3x ETFs. If the index falls on some days, but rises most other days, the added downside is all but certain to make you lose money even though the stock trends upward. That's why these ETFs are designed for single-day bets. Over the long-term, the volatility of the stock market, combined with your exponentially increased downside, guarantees you will lose money. You miss the step where the return being doubled is daily. Consider you invested $100 today, went up 10%, and tomorrow you went down 10%. Third day market went up 1.01% and without leverage - got even. Here's the calculation for you: day - start - end 1      $100    $120  -  +10% doubled 2      $120    $96   -  -10% doubled 3      $96     $97.94 - +1.01% doubled So in fact you're in $2.06 loss, while without leveraging you would break even. That means that if the trend is generally positive, but volatile - you'll end up barely breaking even while the non-leveraged investment would make profits. That's what the quote means. edit to summarize the long and fruitless discussion in the comments: The reason that the leveraged ETF's are very good for day-trading is exactly the same reason why they are bad for continuous investment. You should buy them when there's a reasonable expectation for the market to immediately go in the direction you expect. If for whatever reason you believe the markets will plunge, or soar, tomorrow - you should buy a leveraged ETF, ride the plunge, and sell it in the end of the day. But you asked the question about volatile markets, not markets going in one direction. There - you lose. Here is a simple example of how daily leverage fails, when applied over periods longer than a day. It is specifically adjusted to be more extreme than the actual market so you can see the effects more readily. You buy a daily leveraged fund and the index is at 1000. Suddenly the market goes crazy, and goes up to 2000 - a 100% gain! Because you have a 2x ETF, you will find your return to be somewhere near 200% (if the ETF did its job). Then tomorrow it goes back to normal and falls back down to 1000. This is a fall of 50%. If your ETF did its job, you should find your loss is somewhere near twice that: 100%. You have wiped out all your money. Forever. You lose. :) The stock market does not, in practice, make jumps that huge in a single day. But it does go up and down, not just up, and if you're doing a daily leveraged ETF, your money will be gradually eroded. It doesn't matter whether it's 2x leveraged or 8x leveraged or inverse (-1x) or anything else. Do the math, get some historical data, run some simulations. You're right that it is possible to beat the market using a 2x ETF, in the short run. But the longer you hold the stock, the more ups and downs you experience along the way, and the more opportunity your money has to decay. If you really want to double your exposure to the market over the intermediate term, borrow the money yourself. This is why they invented the margin account: Your broker will essentially give you a loan using your existing portfolio as collateral. You can then invest the borrowed money, increasing your exposure even more. Alternatively, if you have existing assets like, say, a house, you can take out a mortgage on it and invest the proceeds. (This isn't necessarily a good idea, but it's not really worse than a margin account; investing with borrowed money is investing with borrowed money, and you might get a better interest rate. Actually, a lot of rich people who could pay off their mortgages don't, and invest the money instead, and keep the tax deduction for mortgage interest. But I digress.) Remember that assets shrink; liabilities (loans) never shrink. If you really want to double your return over the long term, invest twice as much money. NO. All the leveraged ETFs are designed to multiply the performance of the underlying asset FOR THAT DAY, read the prospectus. Their price is adjusted at the end of the day to reflect what is called a NAV unit. Basically, they know that their price is subject to fluctuations due to supply and demand throughout the day - simply because they trade in a quote driven system. But the price is automatically corrected at the end of the day regardless. In practice though, all sorts of crazy things happen with leveraged ETFs that will simply make them more and more unfavorable to hold long term, the longer you look at it. See http://blogs.reuters.com/felix-salmon/2011/04/30/why-the-sec-should-look-at-levered-etfs/?dlvrit=60132, http://symmetricinfo.org/2011/04/are-investors-in-levered-short-treasury-etfs-a-disaster-waiting-to-happen-pt1/, and the articles linked from it: The issue with holding a levered ETF past 1 day is that investors expose themselves to path dependency in the underlying.... The reason for the difference in payouts comes from the fact that the manager of the levered ETF promises you a multiple of the daily returns of the underlying. To be able to promise you these daily returns, the ETF manager has to buy/sell some of the underlying every day to position himself to have a constant leverage ratio the next day. The short video below explains this process in detail for a 2x long ETF, but the same result holds for a 2x short ETF: the manager has to buy more of the underlying on a day when the underlying increases in value and sell more of the underlying when the underlying goes down in value .
long deep ITM calls is equivalent to owning the equity.  You're going to pay alot and hence will start off in a hole already, and you aren't getting too much leverage there at all depending how deep ITM you go.  Covariance scales, but assuming B-S in order to get nice scaling and ignoring the risks you are actually taking with options (unlimited down-size ie you can lose your entire investment in the option, people forget this) will screw you unless you really know what you are dong.  Leverage means increasing your risk.  long dep ITM is not obtaining much leverage and therefore not risking too much.  but you aren't going ot get 3-4x leverage this way.  you get leverage by saying: oh, i have 100, i could invest in 1 share of stock OR I could buy 100 worth of some option.  If I pick a deep ITM (think strike = 0) it's identical to owing the stock.  If i pick ATM, i have a ~50/50 chance of wining, so i should be able to double my upside.  If I go OTM, i can increase my exposure to the upside while increasing hte chance that my options expire worthless.  So really, i have no idea why deep ITM do what you are trying to do.  and If you don't either, you probably shouldn't do it. "This is an old post I feel requires some more love for completeness.  Though several responses have mentioned the inherent risks that currency speculation, leverage, and frequent trading of stocks or currencies bring about, more information, and possibly a combination of answers, is necessary to fully answer this question. My answer should probably not be the answer, just some additional information to help aid your (and others') decision(s). Firstly, as a retail investor, don't trade forex. Period. Major currency pairs arguably make up the most efficient market in the world, and as a layman, that puts you at a severe disadvantage. You mentioned you were a student—since you have something else to do other than trade currencies, implicitly you cannot spend all of your time researching, monitoring, and investigating the various (infinite) drivers of currency return. Since major financial institutions such as banks, broker-dealers, hedge-funds, brokerages, inter-dealer-brokers, mutual funds, ETF companies, etc..., do have highly intelligent people researching, monitoring, and investigating the various drivers of currency return at all times, you're unlikely to win against the opposing trader. Not impossible to win, just improbable; over time, that probability will rob you clean. Secondly, investing in individual businesses can be a worthwhile endeavor and, especially as a young student, one that could pay dividends (pun intended!) for a very long time. That being said, what I mentioned above also holds true for many large-capitalization equities—there are thousands, maybe millions, of very intelligent people who do nothing other than research a few individual stocks and are often paid quite handsomely to do so. As with forex, you will often be at a severe informational disadvantage when trading. So, view any purchase of a stock as a very long-term commitment—at least five years. And if you're going to invest in a stock, you must review the company's financial history—that means poring through 10-K/Q for several years (I typically examine a minimum ten years of financial statements) and reading the notes to the financial statements. Read the yearly MD&A (quarterly is usually too volatile to be useful for long term investors) – management discussion and analysis – but remember, management pays themselves with your money. I assure you: management will always place a cherry on top, even if that cherry does not exist. If you are a shareholder, any expense the company pays is partially an expense of yours—never forget that no matter how small a position, you have partial ownership of the business in which you're invested. Thirdly, I need to address the stark contrast and often (but not always!) deep conflict between the concepts of investment and speculation. According to Seth Klarman, written on page 21 in his famous Margin of Safety, ""both investments and speculations can be bought and sold. Both typically fluctuate in price and can thus appear to generate investment returns. But there is one critical difference: investments throw off cash flow for the benefit of the owners; speculations do not. The return to the owners of speculations depends exclusively on the vagaries of the resale market."" This seems simple and it is; but do not underestimate the profound distinction Mr. Klarman makes here. (and ask yourself—will forex pay you cash flows while you have a position on?) A simple litmus test prior to purchasing a stock might help to differentiate between investment and speculation: at what price are you willing to sell, and why? I typically require the answer to be at least 50% higher than the current salable price (so that I have a margin of safety) and that I will never sell unless there is a material operating change, accounting fraud, or more generally, regime change within the industry in which my company operates. Furthermore, I then research what types of operating changes will alter my opinion and how severe they need to be prior to a liquidation. I then write this in a journal to keep myself honest. This is the personal aspect to investing, the kind of thing you learn only by doing yourself—and it takes a lifetime to master. You can try various methodologies (there are tons of books) but overall just be cautious. Money lost does not return on its own. I've just scratched the surface of a 200,000 page investing book you need to read if you'd like to do this professionally or as a hobbyist. If this seems like too much or you want to wait until you've more time to research, consider index investing strategies (I won't delve into these here).  And because I'm an investment professional: please do not interpret anything you've read here as personal advice or as a solicitation to buy or sell any securities or types of securities, whatsoever. This has been provided for general informational purposes only. Contact a financial advisor to review your personal circumstances such as time horizon, risk tolerance, liquidity needs, and asset allocation strategies. Again, nothing written herein should be construed as individual advice." This is Rob Bennett, the fellow who developed the Valuation-Informed Indexing strategy and the fellow who is discussed in the comment above. The facts stated in that comment are accurate -- I went to a zero stock allocation in the Summer of 1996 because of my belief in Robert Shiller's research showing that valuations affect long-term returns. The conclusion stated, that I have said that I do not myself follow the strategy, is of course silly. If I believe in it, why wouldn't I follow it? It's true that this is a long-term strategy. That's by design. I see that as a benefit, not a bad thing. It's certainly true that VII presumes that the Efficient Market Theory is invalid. If I thought that the market were efficient, I would endorse Buy-and-Hold. All of the conventional investing advice of recent decades follows logically from a belief in the Efficient Market Theory. The only problem I have with that advice is that Shiller's research discredits the Efficient Market Theory. There is no one stock allocation that everyone following a VII strategy should adopt any more than there is any one stock allocation that everyone following a Buy-and-Hold strategy should adopt. My personal circumstances have called for a zero stock allocation. But I generally recommend that the typical middle-class investor go with a 20 percent stock allocation even at times when stock prices are insanely high. You have to make adjustments for your personal financial circumstances. It is certainly fair to say that it is strange that stock prices have remained insanely high for so long. What people are missing is that we have never before had claims that Buy-and-Hold strategies are supported by academic research. Those claims caused the biggest bull market in history and it will take some time for the widespread belief in such claims to diminish. We are in the process of seeing that happen today.  The good news is that, once there is a consensus that Buy-and-Hold can never work, we will likely have the greatest period of economic growth in U.S. history. The power of academic research has been used to support Buy-and-Hold for decades now because of the widespread belief that the market is efficient. Turn that around and investors will possess a stronger belief in the need to practice long-term market timing than they have ever possessed before. In that sort of environment, both bull markets and bear markets become logical impossibilities. Emotional extremes in one direction beget emotional extremes in the other direction. The stock market has been more emotional in the past 16 years than it has ever been in any earlier time (this is evidenced by the wild P/E10 numbers that have applied for that entire time-period). Now that we are seeing the losses that follow from investing in highly emotional ways, we may see rational strategies becoming exceptionally popular for an exceptionally long period of time. I certainly hope so! The comment above that this will not work for individual stocks is correct. This works only for those investing in indexes. The academic research shows that there has never yet in 140 years of data been a time when Valuation-Informed Indexing has not provided far higher long-term returns at greatly diminished risk. But VII is not a strategy designed for stock pickers. There is no reason to believe that it would work for stock pickers. Thanks much for giving this new investing strategy some thought and consideration and for inviting comments that help investors to understand both points of view about it. Rob "The question ""do they?"" is a fair one, but the answer, ""we can only observe the past, and that's what they did,"" may not be so satisfying to you.  It's safe to say that any longer term view of any market will show far less volatility than a short one. It only takes a glance at the return of the 2000's  2009 27.11   2008 -37.22  2007      5.46  2006  15.74 2005  4.79   2004 10.82   2003  28.72  2002    -22.27  2001 -11.98 2000     -9.11 (for the S&P) to see that in an awful decade containing -37% and -22% that the full decade was ""only"" down 9% in total or just less than 1% per year compounded. I'm not predicting any particular returns forward, just noting this is how the math works.  DCA performs well through such a decade, better than in a rising one. You are offered the opportunity to buy into a market selling below the long term trend.  Added note in response to Enno's answer below - On rereading the linked article, I see where the author cites Zvi Bodie who clearly made a logical error. He concludes that since a 20 month S&P put costs triple what a 2.3 mo put costs, that there's more risk the market falls over the longer period, not less. American options can be sold or exercised at any time. If a 2 year option were cheaper than a 2 month option, no one would buy the shorter term. It's pretty simple that the Options Pricing Models take time into account and their value, put or call, increases along with the time till expiration.  On a lighter note, when I take the S&P data for 1871-2012 (I know, no S&P back then, but it's Schiller's data) I get average 40 year returns of 44X, similar to the author's conclusion, $1K growing to $44K. But, the Standard deviation is 28. So the high end of +1 STDEV is $72K, not the author's $166K. Although, the low end 44-28=16 comes close to his $14K figure. $16K is a 7.18% long term return which today doesn't look bad. When the article was written, the author was looking at a 6% short term risk free rate." "As an aside, why does it seem to be difficult to get a conclusive answer to this question? I'm going to start by trying to answer this question and I think the answer here will help answer the other questions.  Here is a incomplete list of the challenges involved: So my question is, is there any evidence that value investing actually beats the market? Yes there is a lot of evidence that it works and there is a lot of evidence that it does not.  timday's has a great link on this.  Some rules/methods work over some periods some work during others.  The most famous evidence for value investing probably comes from Fama and French who were very careful and clever in solving many of the above problems and had a large persistent data set, but their idea is very different from Damodaran's, for instance, and hard to implement though getting easier. Is the whole field a waste of time? Because of the above problems this is a hard question.  Some people like Warren Buffet have clearly made a lot of money doing this.  Though it is worth remembering a good amount of the money these famous investors make is off of fees for investing other peoples' money.  If you understand fundamental analysis well you can get a job making a lot of money doing it for a company investing other peoples' money.  The markets are very random that it is very hard for people to tell if you are good at it and since markets generally go up it is easy to claim you are making money for people, but clearly banks and hedge funds see significant value in good analysts so it is likely not entirely random. Especially if you are a good writer you can make a more money here than most other jobs. Is it worth it for the average investor saving for retirement?  Very, very hard to say.  Your time might be better spent on your day job if you have one. Remember because of the fees and added risk involved over say index investing more ""Trading is Hazardous to Your Wealth.""" There are legitimate multi currency mutual funds/efts. But I don't think their rate of return will produce the extra money you're looking for any faster than any other kind of investment with comparable risks. To make money fast, you have to accept nontrivial risk of losing money fast, which isn't what you seem to have in mind. With a long enough time horizon, no matter when you buy, equities almost always outperform cash and bonds. There's an article here with some info: http://www.fool.co.uk/investing-basics/how-when-and-where-to-invest/ Holding period where shares have beaten cash  There was a similar study done which showed if you picked any day in the last 100 years, no matter if the market was at a high or low, after 1 year your probability of being in profit was only 0.5, but after 10-20 years it was almost certainly 1.0.  Equities compound dividends too, and the best place to invest is in diversified stock indices such as the S&P500, FTSE100, DOW30 or indices/funds which pay dividends. The best way to capture returns is to dollar cost average (e.g. place a lump sum, then add $x every month), to re-invest dividends, and oh, to forget about it in an IRA or SIPP (Self invested pension) or other vehicle which discourages tampering with your investment.  Yes, values rise and fall but we humans are so short sighted, if we had bought the S&P in 2007 and sold in 2009 in fear, we would have missed out on the 25% gain (excluding dividends) from 2007-2014. That's about 3% a year gain even if you bought the 2007 high -beating cash or bonds even after the financial crisis. Now imagine had you dollar cost averaged the entire period from 2007-2014 where your gain would be. Your equity curve would have the same shape as the S&P (with its drastic dip in 2009) but an accelerated growth after. There are studies if you dig that demonstrate the above. From experience I can tell you timing the market is nigh impossible and most fund managers are unable to beat the indices. Far better to DCA and re-invest dividends and not care about market gyrations! .. "First it is worth noting the two sided nature of the contracts (long one currency/short a second) make leverage in currencies over a diverse set of clients generally less of a problem.  In equities, since most margin investors are long ""equities"" making it more likely that large margin calls will all be made at the same time. Also, it's worth noting that high-frequency traders often highly levered make up a large portion of all volume in all liquid markets ~70% in equity markets for instance.  Would you call that grossly artificial?  What is that volume number really telling us anyway in that case? The major players holding long-term positions in the FX markets are large banks (non-investment arm), central banks and corporations and unlike equity markets which can nearly slow to a trickle currency markets need to keep trading just for many of those corporations/banks to do business.  This kind of depth allows these brokers to even consider offering 400-to-1 leverage.  I'm not suggesting that it is a good idea for these brokers, but the liquidity in currency markets is much deeper than their costumers." How is it possible that long term treasury bonds, which the government has never defaulted on, can hold more risk as an ETF then the stock market index? The risk from long-term bonds isn't that the government defaults, but that interest rates go up before you get paid, so investors want bonds issued more recently at higher interest rates, rather than your older bonds that pay at a lower rate (so the price for your bonds goes down). This is usually caused by higher inflation rates which reduce the value of the interest that you will be paid. Do you assume more risk investing in bond ETFs than you would investing in individual bonds? If you are choosing the right ETFs, there should be a lower amount of risk because the ETFs are taking care of the difficult work of buying a variety of bonds.  Are bond ETFs an appropriate investment vehicle for risk diversification? Yes, if you are investing in bonds, exchange traded funds are an appropriate way to buy them. The markets for ETFs are usually very liquid. "If you want to make a profit from long term trading (whatever ""long term"" means for you), the best strategy is to let the good performers in your portfolio run, and cull the bad ones.  Of course that strategy is hard to follow, unless you have the perfect foresight to know exactly how long your best performing investments will continue to outperform the market, but markets don't always follow the assumption that perfect information is available to all participants, and hence ""momentum"" has a real-world effect on prices, whether or not some theorists have chosen to ignore it. But a fixed strategy of ""daily rebalancing"" does exactly the opposite of the above - it continuously reduces the holdings of good performers and increases the holdings of bad.  If this type of rebalancing is done more frequently than the constituents of benchmark index are adjusted, it is very likely to underperform the index in the long term. Other issues in a ""real world"" market are the impact of increased dealing costs on smaller parcels of securities, and the buy/sell spreads incurred in the daily rebalancing trades. If the market is up and down 1% on alternate days with no long tern trend, quite likely the fund will be repeatedly buying and selling small parcels of the same stocks to do its daily balancing." They have ETFs for most of what you listed above.  Except the deep-fried candy bars.  You know that's just a distributed candy bar that is THEN fried right?  They have a few religious ETFs as well as some socially responsible ones.   There is no reason to make one based on a single person's preference though - ETFs make their money on fees.  For that they need VOLUME.   Move Volume = More Money  Also, there are over 1,411 ETF's in the US as of 2014.  That means there are a lot of options already. You could always create your own if you are a great salesperson though. Source "I'd refer you to Is it true that 90% of investors lose their money? The answer there is ""no, not true,"" and much of the discussion applies to this question.  The stock market rises over time. Even after adjusting for inflation, a positive return. Those who try to beat the market, choosing individual stocks, on average, lag the market quite a bit. Even in a year of great returns, as is this year ('13 is up nearly 25% as measured by the S&P) there are stocks that are up, and stocks that are down. Simply look at a dozen stock funds and see the variety of returns. I don't even look anymore, because I'm sure that of 12, 2 or three will be ahead, 3-4 well behind, and the rest clustered near 25.  Still, if you wish to embark on individual stock purchases, I recommend starting when you can invest in 20 different stocks, spread over different industries, and be willing to commit time to follow them, so each year you might be selling 3-5 and replacing with stocks you prefer. It's the ETF I recommend for most, along with a buy and hold strategy, buying in over time will show decent returns over the long run, and the ETF strategy will keep costs low." "Don't put money in things that you don't understand. ETFs won't kill you, ignorance will. The leveraged ultra long/short ETFs hold swaps that are essentially bets on the daily performance of the market. There is no guarantee that they will perform as designed at all, and they frequently do not. IIRC, in most cases, you shouldn't even be holding these things overnight. There aren't any hidden fees, but derivative risk can wipe out portions of the portfolio, and since the main ""asset"" in an ultra long/short ETF are swaps, you're also subject to counterparty risk -- if the investment bank the fund made its bet with cannot meet it's obligation, you're  may lost alot of money. You need to read the prospectus carefully. The propectus re: strategy. The Fund seeks daily investment results, before fees and expenses, that correspond to twice the inverse (-2x) of the daily performance of the Index. The Fund does not seek to achieve its stated investment objective over a period of time greater than a single day. The prospectus re: risk. Because of daily rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from twice the inverse (-2x) of the return of the Index over the same period. A Fund will lose money if the Index performance is flat over time, and it is possible that the Fund will lose money over time even if the Index’s performance decreases, as a result of daily rebalancing, the Index’s volatility and the effects of compounding. See “Principal Risks” If you want to hedge your investments over a longer period of time, you should look at more traditional strategies, like options. If you don't have the money to make an option strategy work, you probably can't afford to speculate with leveraged ETFs either." There are many technical answers above , but the short story to me is that very few active fund managers consistently beat the market. Look at the results of actively managed funds. Depending on whose analysis you read, you will find out that somewhere between 80-90% of fund managers in a given year do not beat passive index funds. So go figure how you will do compared to a mutual fund manager who has way more experience than you likely have. So, that in itself is moderately interesting, but if you look at same-manager performance over several consecutive years it is rare to find anyone that goes beats the market for more than a few years in a row. There are exceptions, but go pick one of these guys/gals - good luck. Getting in and out of the market is a loser. This is because there is no way to see market spikes and down turns. There are many behavioral studies that have been done that show people do the wrong thing: they sell after losses have occurred and they buy after the market has gone up. Missing an up spike and not being in before the spike is as devastating as missing a down turn and not getting out in time. There is another down side, if you are trading in a personal account, rather than a tax deferred account, going in and out of stocks has tax complications. In short, a broad based equity index will, over time, beat about anything out there and it will do it in a tax efficient manner.  Exchange traded funds (ETFs) are a wonderful way to obtain diversification immediately at very low cost. It would be the sales revenue less everything else. When he says reinvest, that is to say they keep all of the post-tax earnings and place it in retained earnings. This means that it is still the companies money to invest and use to fulfill their goals. If they didn't have any worthy investing opportunities, they could issue dividends. So say your cost of capital is, eeeeeh, 15%. And the best investment you can make will earn you 12%. That's a loss of value. So the company, acting in the investors best interests, will give those funds back so that the investors can allocate that money to more efficient areas. Dividends are one mechanism a company has to control their rate of growth.