In a follow up to yesterday’s post, reader Mark had this to say:
When you use ultra funds or ETFs, what % trailing stop loss do you use to reduce the inevitable whipsaws? 12%, 14% or do you just stick with 7% despite the whipsaws?
For me, it’s not much of a problem since I don’t use ultra funds at all in my advisory business. The volatility is simply too high for investors with a moderate risk tolerance, which is the category many fall into.
Sure, you can use the 7% rule, but chances are that you get stopped out quickly. If you are very aggressive, you can double the trailing sell stop to 14%.
Personally, as have posted about before, some of these ultra funds did not always live up their expectations in terms of accomplishing their stated performance objective. Some have underperformed, which means that you took on more risk without the corresponding potential reward.
I think that these types of leveraged ETFs satisfy the gambling instinct some investors possess. As more of these products are being introduced with 3 times and 4 times leverage, or even more, it makes it difficult to apply simple trend tracking rules. Instead, they’re promoting nothing but a casino like atmosphere.
Comments 5
One thing that I do in order to manage the whipsaw is increase my position over time by purchasing lots which will have different purchase price/highs.I sell the first lot when the limit is hit and the second when and if it is hit. This allows me to stay with funds I like. In hindsight if the trend is upward then it is better to get all in asap. I used this strategy last year with the sectors while waiting for the election/ Obuma effect to settle down.
Ulli,
I have found from my own experience that these 2x 3x ETFs are mostly suited for gambling by making quick in and out trades.
The person made a comment above about waiting till the Obama effect settled down. Boy how can a person get a peace prize for killing all the innocent people that have been killed in Iraq and Afghanistan. What is this world coming to?
Trendman, although I agree with you about Obama how it relates to Afganistan, etc., I thought we, as readers of this column, informally had agreed to discuss investing and trading, not politics. If we get into writing about politics, I think we're not going to be using this column wisely, plus there are plenty of other blogs where we can write about politics. This is an extremely top-quality investment/trading website column, and I hope it will stay that way. I think we, as readers, have to safeguard its integrity and not to rely totally on Ulli. I don't think it's right to make him censor our comments. I hope we can do that ourselves, in order for us to get the most investment/trading thoughts and strategies from this website's column. Thanks.
Thanks John, Trendman unfortunately is a typical right wing kook who thinks rules only apply to others and will take every chance he gets to slam a dem. His ilk is the very reason this country is in hock to China. Lets see, stock mkt with record 60 recovery. Highest bonuses on Wall Street ever; non-existent inflation. If it was Trendman's crew in that chair he'd be bellowing how he walks on water. I dont read this column to see trash talk about dems. I read it to learn from Ulli's wisedom and reserach that he shares.
For amusement on leveraged ETFs, see Jason Kelly November 13, 2009 First 100x Leveraged ETFs and the follow up November 18, 2009 Investors Will Buy Anything.