Sell Stops And Ultra ETFs

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.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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