Getting Leverage. Going Short. May 14, :00 3:00 pm EDT

Transcription

1 Getting Leverage. Going Short. Live Webinar Live Webinar May 14, :00 3:00 pm EDT

2 Definitions A leveraged ETF attempts to provide returns equivalent to a multiple (2x, 3x) of a benchmark, over a specific period of time. An inverse ETF attempts to provide returns opposite, and often leveraged, to a benchmark, over a specific period of time.

3 History First leveraged index fund Rydex Nova Fund, 1.5x S&P 500 First leveraged ETFs ProShares 2x ETFs Continued Expansion First inverse fund ProFunds and Potomac (now Direxion) Direxion launches 3x ETFs Rydex URSA Fund, ProFunds 2 beta funds 1x S&P 500 Potomac 1.25 beta

4 Tremendous Growth Most major asset classes Range from 3x to 3x Over 100 ETFs and ETNs > $30 billion in assets 27% of daily trading volume

5 Tremendous Growth Leveraged/Inverse Assets US$, Millions 30,466 17,254 4,775 April 06 April 07 April 08 April 09

6 Tremendous Growth 2009 Flows s(through April) Long (Traditional) Short Levered Short Long Levered 4,000 2, ,000 4,000 6,000 8,000 10,000 12,000 US$, Millions

7 Tremendous Growth April 2009 ETF Assets Long Levered 2% Long (Traditional) 94% Short 1% Short Levered 3%

8 Tremendous Growth April 2009 ETF Volume ou Long Levered 9% Long (Traditional) 73% Short 0% Short Levered 18%

9 Headline Horror! Warning: Leveraged and Inverse ETFs Kill Portfolios Too many people are making sucker bets with these products. Morningstar, 1/22/09

10 The Big Myths 1. They deliver x% of an index s long term return Wrong it s all about holding period 2. They have huge tracking error No they generally track very well 3. People use them incorrectly Notif youlookatthe the volumes 4. They re ETFs, so they must be tax efficient Shorting and leverage are rarely tax efficient 5. They re poison No; they re a very, very sharp tool in the drawer

11 How They Work Exposure through derivatives Swaps are the vehicle of choice The Swap Contract with a counterparty An agreement to pay a daily return Not a traded security (like a bond) Rebalanced regularly Minimal risk settlement gap

12 Long Term Returns

13 Tracking Error? Not Really Compounding Path Dependency Leverage Drag

14 Short Term: No Problem

15 It s All About Timing!

16 It s by design

17 Tracking Error? Not Really Day 1: Index Level: % ETF Level: 100 Day 2: Index up 10% Index Level: % ETF Level: 80 Day 3: Index down 10% Index Level: % ETF Level: 96

18 Complex Structure of Leverage Index Volatility Index (1 yr) 300% Inverse 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 50% 150% % % % % 82.30% 5.83% 56.92% 82.75% 94.02% 98.16% 45% 135% % % % % 36.63% 29.20% 67.72% 87.22% 95.56% 98.67% 40% 120% % % % 79.08% 4.73% 45.87% 75.48% 90.23% 96.66% 99.00% 35% 105% % % % 40.76% 17.82% 57.91% 80.87% 92.48% 97.40% 99.23% 30% 90% % % 70.66% 12.62% 34.34% 66.31% 84.69% 93.93% 97.94% 99.39% 25% 75% % 86.72% 38.73% 8.73% 46.94% 72.77% 87.75% 95.18% 98.36% 99.52% 20% 60% 83.86% 53.86% 14.16% 24.84% 56.35% 77.65% 90.01% 96.05% 98.66% 99.61% 15% 45% 53.34% 28.29% 4.90% 37.43% 63.71% 81.50% 91.74% 96.75% 98.90% 99.68% 10% 30% 29.22% 7.99% 19.99% 47.46% 69.65% 84.59% 93.12% 97.32% 99.10% 99.74% 5% 15% 9.86% 8.23% 31.99% 55.50% 74.20% 86.85% 94.19% 97.73% 99.24% 99.78% 0% 0% 5.81% % 41.83% 61.95% 78.04% 88.87% 87% 95.02% 98.08% 99.36% 99.81% 5% 15% 18.65% 32.07% 49.84% 67.11% 81.14% 90.44% 95.78% 98.36% 99.47% 99.85% 10% 30% 29.28% 40.99% 56.40% 71.49% 83.62% 91.76% 96.37% 98.61% 99.53% 99.87% 15% 45% 38.13% 48.39% 61.93% 75.17% 85.74% 92.80% 96.83% 98.79% 99.60% 99.89% 20% 60% 45.57% 54.62% 66.57% 78.23% 87.48% 93.73% 97.25% 98.95% 99.66% 99.90% 25% 75% 51.88% 59.92% 70.50% 80.80% 88.99% 94.49% 97.58% 99.08% 99.70% 99.92% 30% 90% 57.24% 64.41% 73.83% 82.99% 90.31% 95.15% 97.87% 99.19% 99.74% 99.93% 35% 105% 61.86% 68.26% 76.66% 84.91% 91.38% 95.70% 98.15% 99.29% 99.77% 99.94% 40% 120% 65.82% 71.57% 79.13% 86.48% 92.33% 96.21% 98.36% 99.38% 99.80% 99.95% 45% 135% 69.26% 74.49% 81.32% 87.96% 93.16% 96.60% 98.55% 99.46% 99.83% 99.95% 50% 150% 72.26% 76.98% 83.17% 89.16% 93.88% 96.98% 98.69% 99.52% 99.85% 99.96%

19 How Long Can You Hold? Journal of Indexes Study, March 2009 ProShares Ultra Dow30 (NYSE Arca: DDM) ProShares Short Dow30 (NYSE Arca: DOG) ProShares UltraShort Dow30 (NYSE Arca: DXD)

20 How Long Can You Hold? 0.50% 1 Day Tracking Error 0.25% DDM DOG DXD 0.00% 0.25% 0.50%

21 How Long Can You Hold? 12.00% 9.00% 6.00% 3.00% 0.00% 00% 3.00% 6.00% 9.00% 12.00% 95% Interval 1 Day Tracking Error 0.06% 0.09% 09% 0.13% 0.13% 0.06% 0.13% DDM DOG DXD

22 How Long Can You Hold? 12.00% 9.00% 6.00% 3.00% 0.00% 00% 3.00% 6.00% 9.00% 12.00% 95% Interval 1 Week kindex Variance 0.22% 0.26% 0.74% 1.00% DDM DOG DXD 0.54% 2.78%

23 How Long Can You Hold? 12.00% 9.00% 6.00% 3.00% 0.00% 00% 3.00% 6.00% 9.00% 12.00% 95% Interval 1 Month thindex Variance 0.54% 0.94% 2.83% 3.98% DDM DOG DXD 1.94% 11.82%

24 DXD Holding In Review 1 Day 1 Week 1 Month 1 Year Worst Case 0.47% 6.05% 16.02% 21.73% Interval 95% 0.13% 2.78% 11.82% 12.60% 0.13% 0.54% 1.94% 23.52% Best Case 0.39% 8.09% 16.54% 52.62%

25 Solving the Tracking Issue Day 1: Index Level: 100 Initial 200% ETF Investment: $100 Day 2: Index up 10% Index Level: 110 ETF Investment: $80 Additional Investment: $30 Total ETF Investment: $110 Day 3: Index down 5% Index Level: ETF Investment: $121 Net result: Index up 45% 4.5%, position loss of 9% on initial investment

26 A Different Path: Monthly? Shifting Math Funds should track as expected if: You get in on day 1 You get out on reset Intra period entries get different exposure

27 A Different Path: Monthly? Day 1 Day 15 Day 30 Index 5% 3x Return 15% Index 10% 3x Return 30% Index 4.76% 3x Return 13.04% Midmonth investor gets less exposure per dollar invested (when the month is positive), or more exposure when the month is negative.

28 Key Issue: Liquidity It s all about spreads RTG (Rydex 2x Tech): Average Volume: ~6,000 shares Spread: 3.5% QLD (ProShares 2x QQQ): Average Volume: ~30 million shares Spread: Consistently a penny

29 Key Issue: Taxes The Rydex Problem: 2008 Cap Gains ETF Name Ticker Short Term Long Term Total Gains Rydex Inverse 2X S&P Select Sector Energy REC 86.61% 0.00% 86.61% Rydex Inverse 2X S&P Select Sector Technology RTW 59.46% 0.00% 59.46% Rydex Inverse 2X S&P Select Sector Financial RFN 42.35% 7.32% 49.67%

30 Panel Discussion LouisStanasolovich CEO & President Legend Financial Advisors, Inc. Dan D. O'Neill President & CIO Direxionfunds Direxionshares Editor of the monthly newsletter, Risk Controlled Investing Worth Top Wealth Advisors 12 consecutive years Three times member of Investment Advisor s IA 25 Responsible for Trading & Operations Designer of Direxion product offerings Experienced alternative strategies ti t t i portfolio manager