ChartWatchers

JUICING UP YOUR RETURNS

 | 

I receive a lot of questions regarding the "ultra" shares and "ultrashort" shares and how to effectively trade them.  In particular, there are always questions asking why those "juiced" ETF returns don't correspond to the indices they're supposed to track over time.  Let me give you an example.  Take a look at the two charts below.  The first is a five month chart of the Dow Jones U.S. Financial Index ($DJUSFN), while the second reflects the ProShares UltraShort Financial (SKF) during that same timeframe.  The SKF is designed to inversely track the $DJUSFN at a 200% clip.  In order to benefit from weakness in financials, you could purchase the SKF and profit to the tune of 200% the decline in the index.  Just keep in mind that a ride on Space Mountain at DisneyWorld will seem like a stroll in the park compared to an investment in the SKF, however.  :-)

On the line charts (line charts show only closing prices) below, take a look at where the SKF closed on February 20th vs. January 20th vs. November 20th.  It was lower each time.  But how can that be if the $DJUSFN is lower each time?  If the index is putting in lower lows, shouldn't the ultrashort SKF be putting in higher highs?  The answer is no - check this out:

DJUSFN 2.20.09
SKF 2.20.09
On November 20th, the $DJUSFN closed at 167.95 and the SKF closed at 262.45.  On February 20th, the $DJUSFN closed at 143.56 while the SKF closed at 188.25.  So over the last three months, the $DJUSFN fell 14.52%.  Since the SKF is designed to inversely double the returns of the $DJUSFN, one would reasonably expect to see the SKF closing roughly 29% higher than it did in November.  Instead, the SKF has FALLEN from 262.45 to 188.25, or 28.27%.  It should have GAINED 29%, but instead it DECLINED 28%.  What gives?  Well, so long as the index moves in one direction or the other, juiced ETFs do a fine job of following at a 200% clip - generally speaking.  However, after several days of ups and downs in the index, the juiced ETFs lose their value and cannot fulfill that 200% promise.  For a fairly simple explanation, go to our website at www.investedcentral.com and click on "Trading the Juiced ETFs".  It's roughly a 15 minute demonstration showing why the juiced ETFs cannot keep pace over time.  If you like to trade juiced ETFs, it will be well worth the time.
 
Here's the bottom line.  Avoid the temptation to trade the juiced ETFs based on its technicals.  I've come to realize that the technicals associated with those ETFs are irrelevant.  Instead, determine your entry and exit points based solely on the technicals of the underlying index that the ETF is designed to track.  From that index, determine your target and apply those measurements to the juiced ETF.
 
Happy trading!
Tom Bowley
About the author: is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market. Learn More
Subscribe to ChartWatchers to be notified whenever a new post is added to this blog!
comments powered by Disqus