Darwin's Finance » Alternative Investments

With Rates This Low, Should You be Borrowing to Invest?

Darwin — Tue, 22 Jun 2010 01:47:40 +0000

I read a rather controversial article recently in the Wall Street Journal aptly entitled “Leverage Baby!” outlining the case for taking on debt to invest it at a higher rate. The main premise of the article was that now may be an optimal time to actually take out loans at extremely low interest rates, use that money for higher yielding investments and keep the proceeds. While this concept sounds plausible and this practice is actually being employed en force by the country’s largest banks (borrowing Fed Funds at 0% and investing it and loaning it out at higher rates), you’re not Goldman Sachs and neither am I. I think this is a risky proposition, especially for routine retail investors.

Stocks May Have Seen Their Best Days – With markets rocketing 70% off their lows in March 2009, what would make you think they’re going to continue to proceed at the “historical” long-term return rates of 8-9% annually? The S&P500 went basically nowhere from 2000-2010 in what will forever be dubbed the “Lost Decade”. There’s no reason to believe the next decade will be any different. In light of the fact that income producing instruments are delivering virtually zero returns, then yes, I do choose to have my investable assets in stocks. But I’m not leveraging up to do so. I just view stocks as the most aggressive asset most likely to exceed inflation, not necessarily that I’d mortgage my house to throw more money at the next BP.

You’re Not a Sophisticated Investor – Even investors who do qualify under the conventional “sophisticated investor” are virtually never sophisticated enough to protect themselves from themselves. Thousands of investors were taken for a ride by the various Ponzi schemes the collapsed in the past 2 years (Madoff was just one of dozens) and many more lost millions in exotic CDOs, MBS and other acronyms they probably didn’t understand. While many of us think we’re smart investors, what the data tells us is that most of us (professional money managers included) aren’t any better at picking stocks than a monkey throwing darts at the stock section of a newspaper. Making the presumption that by leveraging up and investing with any particular assumed return in mind is ludicrous. Stocks could be up, down or flat over the next decade in aggregate. And individual equities? It’s anyone’s guess.

Leverage Can Kill If You’re Called Early – What about if it’s the harmless borrowing from a 401K or a home equity line of credit? That can’t hurt, right? Well, it can, especially if the market implodes again and you have to pay back those funds immediately. For instance, if you took out a 401K loan with your employer and you leave the company or are separated, in most cases, that money is due back immediately or it counts as a distribution subject to a painful penalty with taxes to boot. Also, many borrowers were shocked during the financial meltdown to learn that their lines of credit were being called in. This could very well happen again in 2011. The economy isn’t exactly firing on all cylinders and the Euro zone could well have ripple effects elsewhere in the world.

This kind of reminds me of when I used to engage in peer lending on Prosper.com (subject of a whole other post someday). I used to come across some borrowers who would state that they were looking to borrow on Prosper and use that money to invest at higher returns. I couldn’t help but laugh. This 20 year old guys is going to borrow money at 9% and make a positive return? What is he investing in? And who are the fools willing to lend him the money in an unsecured loan assuming they’ll ever see that money back? Well, the ideas proposed in the WSJ article aren’t that much more far-fetched. Borrow at 4-5%, make 8-10% in stocks and keep the rest. If only it were that simple…

Is it a Gold Bubble When You can Cash in Gold at Sears and KMart?

Darwin — Tue, 18 May 2010 01:53:10 +0000

If last week’s story on how you could now extract gold coins from an ATM in Dubai didn’t hint at a gold bubble, and tonight’s rant by Jim Cramer about 6 reasons to buy gold (now, that’s a timely call 2 years into the run!) how about when cash-for-gold stands start popping up in big-box retail stores? Today, it was announced that at Sears and KMart stores, shoppers can send their gold or silver belonging to Pro Gold Network, a company that buys precious metals. Similar to other mail-order cash-for-gold services, they’ll make an offer and then the consumer can choose to accept or decline the offer and have their wares returned free of charge.

Gold Bubble or a New Normal?

On one hand, if you hearken back to seeing all the no-money-down mortgage pitches on late-night television with a housing crash not far behind, skeptics may be thinking this is a pre-cursor to the top of a gold bubble. On the other hand, what if this portends a New Normal in currency whereby gold is just a newly prominent fixture of currency since all western economies are debasing their currencies by printing money indiscriminately? Maybe what this means is that gold is going mainstream, right? Whereas people who hoarded and bartered in gold used to be considered wacky gold-bugs, what if further into the future, gold represents a more mainstream form of currency?

Thinking of Selling Your Gold?

If you’re thinking about selling your gold, the first question you should ask yourself is why you’re doing so. If it’s because it’s some junk necklaces laying around and you figure you might as well get a few hundred bucks out of that pile instead of leaving it there, then perhaps that makes sense now that it’s on your mind. If it’s because you think you’re capitalizing on a peak or you can get a great deal through a particular service, you may want to reconsider. In both cases though, gold may very well be worth double or half of what it’s worth now a year from today. So, think about why you’re selling long and hard, especially if there’s any sentimental value attached to what you’re selling.

First of all, most of the mail-in services I’ve researched are either a) borderline scams or b) offer an unacceptably low return on the true value of the gold you’re turning in. A better option from what I could garner is to take your jewelry to a couple local reputable jewelers, ask them to give you a bulk quote and just go with the highest offer. This way you don’t have to contend with services claiming to have “lost” your package, giving you a hassle when you want your gold back and worse. One of my sources of research was a Consumer Reports Article where they bought several gold pendants for $175 and the results for sale prices were pretty shocking. Most of the cash-for-gold mail companies were offering only 11-29% of the meltdown value, whereas jewelry stores and pawn shops could offer substantially more at 35-70%. What’s that about an internet/mail business with low overhead being more efficient and providing more value to consumers? While it works for Amazon and online banks, it seems like the laws of commerce and economies of scale work in the opposite direction for these cash-for-gold outfits. So beware!

Getting in on the Gold Rush?

If you’re a buyer of gold, you should familiarize yourself with the various methods of investing, as well as gold capital gains tax treatment since some ETF investments are taxed at a higher “collectibles” rate compared to various other ETFs, ETNs and mining companies.

While all this gold business may not seem very important to you now, it’s evident that gold is taking up an ever-increasing portion of the evening news and financial discussions. Even if you’re sitting it out and you’re not a buyer or a seller, it’s probably worthwhile to learn a bit more about the dynamics between gold, the economy, fear in the stock/currencies markets and why everyone’s talking about it. It seems like it’s here to stay.

What Are Your Thoughts on Gold?

Wish You Invested in the Success of Avatar? Now You Can with Movie Futures Investing

Darwin — Tue, 13 Apr 2010 10:20:26 +0000

Have you ever just known a much-vaunted movie was going to be a stinker? Or you picked a gem that turned out to be a huge hit? Well, now you get a chance to be an industry executive and profit from your wisdom. In a similar vein to yesterday’s post on How to Invest in Facebook and Twitter even though they’re not publicly traded, I came across an interesting business plan that will allow you to invest in the future success of movie releases. There are a couple companies vying for this piece of the action, but the most proximal decision from the Commodities Futures Trading Commission will come on April 20 in regards to Cantor Fitzgerald’s “Domestic Box Office Receipts Futures Contract”. Each $1 million change in box-office revenue will increase a contract by $1.

Imagine if you got in on Avatar early, right?

Apparently, film industry execs aren’t pleased with the service because, in my opinion, they don’t want the horrid market performance of their duds to get out before suckers fork over the money to see them. Think about how many horrendous movies we’ve all been to (especially those with young kids) because of a great trailer and heavy promotion. Sometimes the best critics get it wrong too. Next thing you know, you’re watching Mission Impossible 2 while your wife’s staring at you shaking her head – for the entire movie! The market may be a better arbiter of future success than individuals.

As long as these futures exchanges are facilitated well and there’s enough volume and liquidity to keep the spreads to a minimum, I love the idea. For some time, I’d been participating in the InTrade Futures world events; I’d previously bet against US/Israel bombing Iran’s nuclear facility, I didn’t think we’d find Bin Laden (not that I wouldn’t love to be wrong) and I’d bet against earthquakes. Pretty interesting stuff you can hedge against (“bet”), but Intrade isn’t governed by the same rules and I sometimes had issues with wide spreads.

And by the way, right now Sarah Palin is listed as having a 25% of getting the nod for Republican nominee in 2012.
Are you kidding!?!

If you like learning about unconventional investment opportunities like this, check out my category on Alternative Investments.

I’ll update on new developments in this Movie Futures Space, so Subscribe Free to stay up to date.

How to Invest in Facebook, Twitter and LinkedIn

Darwin — Mon, 12 Apr 2010 10:28:41 +0000

The saying “It takes money to make money” seems to manifest itself at every corner. If you want to become a landlord and exploit the leverage and interest deductions allowed while having someone else pay your rent, you need money for a sizable down payment (unless you fall for the scammy infomercials touting the guy with 1 tooth that bought 3 properties last year with no money down). If you want to buy a profitable business and grow it further, you need money. Today, I learned that while the general public can’t invest in private companies such as Facebook, Twitter, LinkedIN and other hot services that I know and love, I could invest in them – if only I were an “accredited investor”.
I was reading about a company Second Market which bills itself as the leading clearinghouse for the buying and selling of private and illiquid assets. Basically, since employees and investors in these companies have “shares” but they’re not traded publicly, when they want to unload some shares, they do so on Second Market. And I’d likely oblige in taking some shares off their hands at the market rate if I had the opportunity.
Here’s how the $70 Million in share exchanges shaped up in March:

source: TechCrunch

However, in order to become an investor with Second Market, you need to be in the club. That would be the Accredited Investor Club.

What is an Accredited Investor?

In the US, an accredited investor is required to have a net worth in excess of $1 Million or have made over $200,000 each year for the last 2 years (make that $300,000 if married) and have an expectation to repeat for this year as well. Well, that precludes most everyone save for the very upper echelon of earners in the country. The thinking is that these are “sophisticated investors” that are able to navigate the complexity of exotic instruments and could more reasonably recover from a sizable loss (like the 50% retail investors lost in 2008-2009?). Anyway, the Securities and Exchange Act of 1933 is protecting us from ourselves.

What I find frustrating is that if I had the opportunity to invest in the likes of Facebook, Twitter or LinkedIn years ago when I first started using them, I’d be looking at a substantial return on my investment – much better even, than how I’ve fared recently in stocks. But alas, I’m not an Accredited Investor.

And of course, there are ways to make money if you’re not rich – like blogging! Or starting a small business from the ground up. But that’s a long, arduous process, as opposed to buying a stake in an existing profitable enterprise or other passive income options people routinely explore.

Would You Invest in Facebook, Twitter and LinkedIn if You Could?

Check Out These Interesting Financial Products and Deals

Darwin — Fri, 05 Mar 2010 12:44:08 +0000

There are some neat new sites, services and deals out there that can either boost your bottom line with minimal effort or flat out provide entertainment value with no discernible benefit. Here are a few in no particular order:

Blippy – Blippy is perhaps one of the strangest new services I’ve seen this year. I have yet to figure out what the actual value or utility is to society, but I’ve gotta admit, it’s an interesting concept and rather amusing to watch. Frankly, I’m not sure if I’m more amused by the content of the site or the fact that multiple legitimate venture capital firms are backing this garage experiment. Basically, you create a profile and publicize for the world to see every purchase you make. On one hand, this sort of voyeurism is sure to be a hit for the same population that loves reality TV and blogs that share relatively insipid yet personal details about the author that for some reason draw massive readership. Conversely, from the participant’s point of view, perhaps it’s either narcissism or a last-ditch attempt to force some sort of fiscal restraint by just putting it all out there for all to see. For instance, many studies have shown that people are more likely to lose weight if they face public shame or embarrassment by not meeting their objective once their journey is tracked by a viewing public. i.e. The Biggest Loser, someone posting a before/after body shot on their blog, etc.

Whatever the outcome of this venture, it’s worth at least looking at once to just ask, “Why?”

6-Figure Salaries – If you’re making $75,000 or more and want to at least keep tabs on what your market value is outside your current role, The Ladders is such a cool site. I signed up a while back and I get automated emails based on my preferences for region, the field I’m in, positions I’d consider, etc. I get an update weekly or so with Director of this, Project Manager of that, salaries list, locations, etc. It’s pretty neat – and it’s FREE to sign up and get the initial updates. Since so many job postings out there aren’t aligned with your actual interests or they have lousy salaries, The Ladders is great at screening just what you’re interested in (or finding out what your boss makes!).

A CD You Control? – There’s a pretty interesting new product from Ally Bank that I’ve never seen before. The Rising Rate CD is a certificate of deposit that allows you to actually increase the rate once during the term in case rates rise on the same term CD and you feel you’re missing out. Feel like a sucker locking in a low rate today so it’s just sitting in an even lower yielding savings account indefinitely? This may be the solution. If rates spike as the Fed reacts to inflationary forces, you can jump your rate up at will. Check out the Rising Rate CD details.

No Penalty CD – Ally Bank also has a No Penalty CD that combines a competitive rate with the ability to break the CD and withdraw funds without the downside of a CD penalty. More info on the No Penalty CD.

$100 Signup Bonus – at OptionsXpress. This is a top options trading outfit that of course, allows you to trade stocks as well. Given the $100 signup bonus, even if you already have an online broker you like using, it’s worth setting up this extra account for a free $100. You only need $500 to open the account so it’s a 20% ROI right off!

0% Down Mortgage? In 2010? You’re not seeing things. Under an obscure US government program that isn’t widely publicized, thousands of American families are still getting mortgages with NO money down. It’s called the USDA Farm Loan but most of the people partaking live on anything but a farm.

Double-Digit Returns in Any Market – Update 2

Darwin — Thu, 25 Feb 2010 12:58:54 +0000

It’s been a month since I published Darwin’s Inverse Leveraged Short ETF Strategy and the results are astounding. In short (no pun intended), since leveraged ETFs lose value over time due to the simple, yet deceptive properties of daily rebalancing, by shorting opposing leveraged ETF pairs simultaneously, in most markets (MOST), you make money by shorting these depreciating assets to the tune of 11%-50% annualized, depending on what the market is doing. The strategy requires some maintenance in the case of a runaway market like the 65% from the bottom we saw in the 9 months following the March 2009 lows.

To recap, here was the table I shared in January with my actual trading account results showing annualized returns of anywhere from 11%-53% depending on the particular ETF pair (full list of all leveraged ETFs ). These returns were presented in a conservative fashion, by accounting for distributions for short dividends payments, distributions, etc.

YTD Hypothetical Scenario: 12% – 30% Annualized

For the month of February, I’d like to share how these trades held up in the YTD period for about 2 months’ perspective, and also, share some new short positions I just initiated.

Here’s a chart with the YTD performance of these same short pairs positions:

They’re all net losers YTD. That’s good. Because I’m short. To put into perspective what a couple % here and there means each month, I’ve put these YTD returns into the same format I had in my initial short leveraged ETF pair article. See below:

New Short Positions

Additionally, due to a combination of which shares were available for shorting last week combined with a desire to mix of my asset classes, I also entered into new short paired positions for the following:

(CZI) – Direxion Daily China Bear 3x Shares ETF
(CZM) – Direxion Daily China Bear 3x Shares ETF

(AGQ) – ProShares Ultra Silver
(ZSL) – ProShares UltraShort Silver

(TYH) – Direxion Daily Tech Bull 3x Shs
(TYP) – Direxion Daily Tech Bear 3x Shs

In doing so, now I have a mix of commodities, countries and sectors. I had initially considered adding a Currency short pair to the mix (if I could find the shares), but the volatility wasn’t high enough to justify the effort and margin requirements. Even when factoring in the weak dollar trend we’ve seen recent history with the subsequent rebound, the annualized gain over most periods is roughly flat to high single digits. I’m focusing my efforts on a mix of diverse/volatile sectors to optimally exploit this phenomena.

I’m going to continue to update on my returns and trades monthly so be sure to Subscribe Here for Free for future updates and also be sure to check out my other project, the ETFBase for new ETF launches, new strategies and market-beating ETFs.

Darwin’s Inverse Leveraged Short ETF Strategy – Incredible Results Outlined

Darwin — Tue, 26 Jan 2010 12:13:03 +0000

The time has arrived to finally unveil Darwin’s Inverse Leveraged Short ETF Strategy. If you’re wondering what it is and why it matters, in a nutshell, it has completely changed the face of trading for me – and it can for you too, if you have the access to the 2X or 3X Leveraged Funds required, if you enable margin trading, if you have the capital requirements and if you can monitor and sustain risk of loss. It’s a long name, and it can be complex to follow so please read along.

What is Darwin’s Inverse Leveraged Short ETF Strategy?

I will start at the most basic level and delve into increasing levels of complexity as we go. At it’s most basic level, you short opposing leveraged ETFs at the same time with equal funds. The desired outcome is a market-neutral strategy whereby you can reap significant returns over time regardless of what equities at large are doing. What wealthy investors pay a hedge fund manager 2% plus 20% of profits is now at your fingertips – with risks, that you must understand and manage. Take a look at the chart below for an example from 2009. I’ve charted the performance of the 3X short ETF, 3X Long ETF and the underlying sector ETF all related to the Financial Sector.

Note how the Blue Line (XLF – 1X Financials ETF) is up marginally over the period. Meanwhile, FAS, the 3X Leveraged Financial ETF is down close to 50% while FAZ, the 3X Short Financials ETF is down over 90%. If you shorted both FAS and FAZ for calendar year 2009, you made 50% on FAS and 90%+ on FAZ for a normalized gain of 70%. You made this 70% during one of the most tumultuous, volatile and desperate trading years in our generation. And get this – you’re not really putting up the funds to earn that 70% (sort of). You can be long in whatever you want (cash, stocks, bonds, whatever) and use your short capability to dedicate a portion of your portfolio to daul inverse short ETF positions as I outline below.

Wait, if one Leveraged ETF is up, the Inverse ETF must be down, right?

Nope – More often than not, they’re both down over long periods of time (just months, we’re not talking years here). That’s the tragedy (for long investors) and the beauty (for shorts). Due to daily rebalancing, which slowly erodes the value of these ETFs, everyone’s screaming from the rooftops that they’re bad buy and hold investments. In fact, there are numerous lawsuits against Direxion and Proshares for selling these “instruments of mass destruction” to retail investors – and even professional money managers – who can’t grasp the concept. Basically, if you’re going to take a number and go up 2%, down 2% bouncing back and forth, as long it’s not a steady march in one direction for weeks on end, both sides will decline over time. Try it out yourself in a spreadsheet – you’ll see – it’s that simple. Since they are such bad investments over time, rather than diving in head first and buying them; short them!

Darwin’s Actual Returns: Inverse Leveraged Short ETF Strategy

So as to remove any doubt, I’ve included the actual screenshot of my trading account as of this weekend where Ameritrade clearly outlines my total gains and losses since opening the position. In each of the pairs (ERX) (ERY) Energy, (FAS) (FAZ) Financials and (GLL) (UGL) Gold, I’m up. Note how the NET gain for each pair is positive – that’s the key. I’m up regardless of what happened to the underlying sectors. In order to understand what these returns would look like on an annualized basis, I’ve performed some nifty excel functions since I’ve only been in each position for a few months. I also made sure to include the impact of short dividend sales and distributions that occurred late last year (which makes my return look worse, not better).

Double Digit Returns – Nice!

You might be saying “So what? The S&P500 is up 65% since the bottom in March. And you’re wasting time making 37%?“ That would come from someone that’s totally missing the point. The market will not be up 65% again in the foreseeable future. The market will undergo corrections and lackluster years. This model is blissfully indifferent to the whims of the overall market returns. This model can also make 37% when the market is down. It can make 37% when the market is flat. By using sectors that aren’t correlated closely (oil, gold, financials), and offsetting the time of entry, I’m even introducing diversification into the returns of each pair.

Remember Madoff? People Lost Their Life Savings Chasing 12% in Any Market.

Well, this is as transparent as it gets and you can capture double digit gains annually in any market – as long as you manage and understand your risks as outlined below. I will continue to share my specific short trades and results here (Subscribe).

Sounds Too Good to be True – What’s the Catch?

There’s an important factor I didn’t share yet – and I want to highlight it prominently. This model breaks down when the underlying sector takes off. There are margin issues to consider. There are several risks and considerations – please read the next section before trying this.

Risks and Considerations

I already have a disclaimer on my blog, but I want to reiterate that fact that I am not certified to provide financial advice. I am an individual trader and not your adviser. If you want to embark on a risky strategy that entails margin requirements, the ability to cover margin calls, the ability to sustain losses in the event of unforeseen market moves, and other risks that may not have been outlined here, you should consult your own adviser before doing so. I think you get the point. Aside from that, I want to highlight where this model breaks down and how I personally manage risk in my leveraged short portfolio:

Not Enough Shares to Short with Broker: I ran into this with my TMF/TMV Short Pair as evidenced in the performance snapshot. Basically, Ameritrade called up one day and said I had to close out my short position because there weren’t enough shares to short. This was a few months into the position and in looking back to 7/1/09, if I still held those shares short, I’d be up an impressive 19% on average since they each lost 19% over that ~6 month period coincidentally (see Short Treasury Pairs Chart Below). That was one of those circumstances where each side of the trade lost a substantial amount of money over a brief period. Anyway, there’s really nothing you can do to prevent this from happening other than going with a larger online broker and going with the more prominent pairs. What I’ve found is that multiple pairs I’ve tried to short with multiple online brokers have not been available to short. So, I’ve had to settle with the 3 pairs I have going now.
Margin Call – Given the recent more stringent margin requirements for leveraged ETFs (which really did nothing to address the lack of understanding of these instruments and only made it more expensive to trade), it’s entirely plausible that when one of the pairs may have gained by say, 50% (meaning you’re 50% in the hole in a short position), even though it’s inverse ETF pair may have lost, say, 70% (meaning you have a 70% gain there, for a net 20% positive position), the customer service rep likely won’t even understand the math involved and quote procedure and say that you’ve either gotta pony up more capital or close out your short position. While this would still net you a gain overall in this hypothetical scenario, you may be margin called in a sub-optimal situation or have no extra cash to input.
Margin Costs – Depending on what sort of other capital and holdings you have in your portfolio, be careful that you’re not paying exorbitant margin fees to maintain this strategy. While I’m not getting hit with margin expenses because these positions aren’t occupying a majority of my portfolio, if you have this strategy eating up the max margin window, you may be paying 10%+ in margin fees to maintain a strategy that may not even make 10% for you ex-expenses.
Runaway Market - This is pretty much your largest risk. While I outlined how you can make money on both sides of the inverse leveraged ETF pairs in many situations, when an underlying index appreciates (or depreciates) so rapidly on a routine daily basis without a significant break in the trend, you can literally have runaway returns. Remember how you can say, make 40% on one side and lose 32% on the other side and still come out ahead? Well, what happens when a leveraged ETF returns over 100% in a given period? You can’t make more than 100% by shorting anything – it’s mathematically impossible. What would actually happen is your gain would be maxed out at around 90% while the runaway leveraged ETF could be up say, 200% (net loss of 110%). Recall, when you short something, your losses are infinite. See below on how I manage a Runaway Market. To demonstrate an extremely bad situation, see below (Bad Chart) for what happened from the absolute pivot bottom in March until September in 2009. FAS was up over 500% ! This would have killed an investor who stayed in short without taking evasive action.

How to React to a Runaway Leveraged Short ETF Situation

What do you do if you undertook the strategy when an underlying index takes off, delivering triple digit gains on one side of the coin? There are a few options at your disposal, none of them being optimal.

First, you could run for cover and just close your positions. You’d take a loss, which happens in trading. I’d advise against just closing your losing position and letting the other one run since it’s no different than just opening a 1-sided short position now, which is more akin to just picking a direction and shorting it as opposed to the market-neutral returns the Inverse Leveraged Short ETF Strategy is supposed to deliver.

The next strategy, which is what I’ve modeled out and started to do for one position when it ran involves offsetting risk of further loss and seeking a new market-neutral overlay position with stock options. It’s rather complex, and up front, one can’t possibly line out how every scenario must be confronted on a generic level. Much depends on which underlying index you’re dealing with, what volatility looks like, how far out of whack the inverse ETFs are, etc. This will be the subject of Part 2 (subscribe for free for future posts) of this series on Darwin’s Inverse Leveraged Short ETF Strategy. In short, you reset the equation with options (either puts or calls, writing or buying [depends on the situation]) such that if the dual short ETF strategy runs away on you, your are compensated by the overlaid options position(s). The bottom line is you’ve gotta be prepared for another run up or down because this runaway scenario can and does occur.

How Does This Strategy Fit Into My Portfolio?

As I alluded to earlier, there are now pretty rigid margin restrictions and lack of available shares to short out there, so you can’t go willy-nilly shorting all kinds of pairs without collateral to back it up. In my case, these short positions occupy a portion of a broader trading portfolio that includes long stock positions, options, credit spreads, and other strategies. As such, a failure of any one or two inverse short ETF pairs wouldn’t be devastating, nor would it trigger margin costs that I couldn’t readily rectify. I just want to make it clear that you can’t go open a trading account funded with $2,000 and go short $2,000 in ETF pairs. If you’re considering this, consider how it fits into your broader portfolio, if at all.

Why Am I Telling the World About This Strategy?

I’m not the only smart guy out there who’s figured it out. And I’m not that smart – the traders at Goldman and the quant funds are smart. There are probably crazy blocks of trades going on exploiting this stuff on a daily basis with all kinds of derivatives, options and futures supplementing these strategies. Think of this as the poor man’s hedge fund. As such, it’s only a matter of time before it’s out there, so why not be the first to publicize and share what I’m doing? I wanted to allow several months of tested data to show that I was putting my money where my mouth is, and it’s looking good at this point. Might wider adoption result in fewer shares to short, impacting my ability to continue to do this into the future? Maybe, but there will likely be an ample supply of uninformed retail investors continuing to flood into long positions in leveraged ETFs despite my best attempts to highlight Leveraged ETF Risks of value decay over time.

Reference

Short Treasury Pairs Chart

This is what a good chart looks like – when both sides of the Leveraged ETF Pair lose value over a short period of time. Just let it ride!

Here’s What a BAD Chart would Look Like:

When this happens, you can’t sit idly by and watch your margin short position take off. Back at the 50% up mark on FAS, I would have taken evasive action as outlined above.

Check out the tickers in the lists below, plot them side by side in Yahoo!Finance or Google Finance charts and move the slider around. You’ll find some cases where this worked out beautifully and some where you could be caught with a losing position. The trick is to find the right pairs and manage the position closely by checking at least once per week.

Full Leveraged ETF List for your reference.
If you need ETF Tickers for general sectors, here are over 800 ETF Tickers by Description.

This post will surely result in some discussion and questions.
Shoot.