Guys, I added small positions in DOG (inverse etf for the Dow30) EPV (ProShares UltraShort Europe) and I am also considering adding a little UVXY (ProShares Ultra VIX Short-Term Futures ETF).
My question: I have read that these inverse and levered etfs are not ideal to hold for the long run.
How long is "too" long to hold them for? Is this something you guys would do? How do you guys hedge yourself from the market volatility? I do not have access to an options or a margin account so I cannot sell short.
Right now I have about 10% of my portfolio in these inverse etfs, the rest is in equities.
Thanks
If you read the prospectus, it usually says the vehicle is best suited for daily trades.
I would be careful to not invest in something you don't fully understand - VIX instruments aren't totally straightforward.
This is my question - why only daily trades? Is it the re-balancing and compounding of daily returns that makes them ideal only for short term trades?
I don't think normal bear funds have the same disclaimer - just levered vehicles. Leveraging the daily compounding makes the original investment decay faster. The reason I cautioned on the VIX fund is because VIX seems a bit harder to grasp if you're just starting to learn about investing. You have to understand the spot VIX itself, its future curve, and the strategy of the ETF/ETN. Look up what happened to the Credit Suisse TVIX for example.
Disclaimer - I'm a total rookie as well.
The volatility kills levered and inverse ETFs because they are selling low and buying high. For example, if you own a levered ETF (normal, not inverse) and the market tanks, your leverage increases and you are forced to sell futures to get back down to your target leverage. Less frequent rebalancing is ideal for a long term investor, but if the market goes down 33% you've lost all of your capital.
Don't trade VIX futures unless you know what you're doing.
I am not an expert, but the unlevered inverse ETFs are probably run the same way as the levered inverse ETFs, but with different target leverages (1x instead of 2x or 3x). Swaps are illiquid and have counterparty risk.
Path dependency and credit risk are the enemies of investors in these funds. You should take the time to learn about them before investing. These types of funds rarely meet an investor's expectations. The reason they say they are daily targets is because that is true. If I buy $50 in S&P and $50 in inverse S&P, my risk is greater than zero (not counting fees which make it worse). For a, market neutral fund, the ETF is a disaster because it ties up half your capital, even if they rebalance it properly.
First off, why the hell are you attempting to hedge your portfolio when you can't even manage to get a margin account? Most online brokers require $2K for a margin account and you can gain access to options trading with a cash account.
As the others have already pointed out, your 'hedges' are going to be just as fruitful as JPM's.
UVXY ? ?? You better be an experienced trader .
I'd be a little careful hedging with an inverse levered ETF. Those are really meant for short term trades.
A lot of people have cited losses due to volatility-and I think its sometimes useful to back those adjectives up with some numbers. There is a path dependency-as these ETFs reset daily.
The assumption for these indices is that they follow a geometric pattern-so for a fraction f of a portfolio P in invested in index I can be expected to see the following equality hold:
delta[ln(Portfolio)]=fdelta[ln(I)] - (f^2-f)var^2 * delta[t/2]
Where var is the variance of the index. So the position will lose some return since the variance term is squared-and this will grow the longer the position is held (again f>1 or fETF will most likely deliver inferior returns. ** The exception here is when the market declines significantly and with a low volatility.
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