Leveraged ETF Short List Update

Running late, so all I have is an update to closing prices.  A good day for the fund, on a flat day for the markets.  $RUSS and $NUGT dropped, which is good for my short positions

NUGT	9.69	10.47	0.78
BIS	30.38	29.75	(0.63)
TZA	9.89	9.90	0.01
VIXM	55.45	54.60	(0.85)
RUSS	33.88	30.40	(3.48)
CORN	23.48	22.68	(0.80)
FAZ	11.53	11.45	(0.08)
UVXY	41.49	40.68	(0.81)
FXP	28.22	27.58	(0.64)

Watching the NBA Finals tonight.  Go Cavs!

The Math Behind my $FAZ and $TZA Short Positions

Yes, it’s been a week and I am still holding my short positions in $FAZ and $TZA, both Direxion 3X Bear ETFs.  A few of my readers have asked if I am still holding, even though I haven’t made much money on them.  Or wondering why I didn’t take a small profit. 

First, to be clear, $FAZ and $TZA are inverse ETFS.  When the market goes up, these will go down.  Well, specifically, when financials go up, $FAZ goes down, and when small caps go up, $TZA goes down, and vice versa.  So shorting these two is a wager that the market is going up. 

Since the market generally goes up over time, I have this in my favor.  Also, rebalancing has a negative effect on these ETFs, also in my favor.  In this post I want to address a feature of these ETFs related to volatility. 

I’ll focus on $FAZ for this, and it’s opposite ETF, $FAS.  When $FAS goes up, $FAZ goes down, b pretyty much the exact percentage each day.  Sometimes odd things happen on a daily basis, but we can ignore that for the most part. 

Let’s start with an assumption that on the first day, $FAS goes up 1% and $FAZ declines by that same 1%.  Then on day two, the exact opposite happens.  You would expect that the result would be that both stocks end up unchanged.  But no, that’s not the way it works.  See the table below:

Day	$FAS	$FAZ
0	$100	$100
1	$101.00	$99.00
2	$99.99	$99.99

As you can see, both ETFs end up lower than where they started.  Only a penny.  But if we continue over 10 days. 

Day	$FAS	$FAZ
0	$100	$100
1	$101.00	$99.00
2	$99.99	$99.99
3	$100.99	$98.99
4	$99.98	$99.98
5	$100.98	$98.98
6	$99.97	$99.97
7	$100.97	$98.97
8	$99.96	$99.96
9	$100.96	$98.96
10	$99.95	$99.95

The losses magnify. This is only one factor, but over the long term, it is definitely a negative for the buyers of these leveraged ETFs.  So, I short them. 

A couple caveats.  One, it’s very unlikely you will get that kind of back and forth pattern regularly.  But it doesn’t matter, as any volatility over time will have the same impact.  Second, though is what happens if you don’t get that volatility?  What if stocks go down and just keep going down?  I’m not going to kid you, that’s a real risk of this strategy.  You can get burned.

That said, every strategy has risk.  It’s why I don’t recommend blindly following what I do.  Please do you own due diligence.   But I am willing to take the chance that the market will have its ups and downs. 

Not a very good day for the market or for me. At the end of the day, this is how I stand:

	Close	Initial Short	Gain (Losss)
NUGT	10.06	10.47	0.41
BIS	29.75	29.75	-
TZA	9.79	9.90	0.11
VIXM	55.65	54.60	(1.05)
RUSS	35.70	30.40	(5.30)
CORN	23.46	22.68	(0.78)
FAZ	11.58	11.45	(0.13)
UVXY	42.48	40.68	(1.80)
FXP	27.40	27.58	0.18

Why I am Short $BIS Biotechnology

If you check the other posts on this blog, you can see I have taken short positions on a number of 3X ETFs.  These are designed to move 300% of the daily move of the underlying index.

A week or so ago I also shorted the Proshares Ultrashort Nasdaq Biotech, ticker $BIS, a Bear ETF.  The difference with this one is that it is only 200% of the underlying, which is pretty much equal to the $IBB. The Bull index for Biotech is the $BIB.  It’s easy to get confused on these.  You just have to pay attention to what you are working with.

The fact that it is 2X rather than 3X would make it less volatile in theory.  However, this is a Biotechnology index, which is already extremely volatile.  Also, it is likely that a 2X will decay less than a 3X, but again, these things aren’t guaranteed to work in the future the same way they worked in the past.

Still, if you are investing, it helps to have some reasoning. 

Looking at the year to date performance of the three listed:

$IBB is up 20.33%

$BIB is up 42.69%

$BIS is down 36.15%

Wait a minute. That’s not how it’s supposed to work, exactly.  $BIS is up more than 2X and up more than $BIS is down.  Strange things can happen using any particular data points.  If I were to run this on other timeframes, it may work.  Or not.  Either way, I am have multiple reasons for shorting $BIS.  Only time will tell if it works for me or not.

It wasn’t much of a day in the market.  A lot of volatility from the Jobs Report, the Dow and S&P were down slightly and the Nazz was up.  For a number of reasons, I had a very good day.  I didn’t recoup all of yesterday’s losses, but close.  See my overall positions below. 

	Close	Initial Short	Gain (Losss)
NUGT	9.79	10.47	0.68
BIS	29.38	29.75	0.37
TZA	9.65	9.90	0.25
VIXM	54.96	54.60	(0.36)
RUSS	35.32	30.40	(4.92)
CORN	23.18	22.68	(0.50)
FAZ	11.38	11.45	0.07
UVXY	40.73	40.68	(0.05)
FXP	27.96	27.58	(0.38)

Enduring Short Term Pain for Long Term Gain

This post will be a little different based on the market action today.  A fairly negative day as most of my positions dropped along with the general market. The ETFs I am short are mostly Bear ETFs, so when the market goes down, they go up.  Being short costs me.

Also, because they are leveraged, they go up more, sometimes a lot more than the market goes down.  It is why it’s important to keep the positions right sized and not too correlated.

So today, I got drilled.  I lost on most of positions, with $RUSS and $UVXY getting the worst of it, offset by a gain in $NUGT, which followed the price of gold down.  Not good, but an inherent risk of the strategy. 

As long as the losses are controlled, it’s OK.  The long term strategy is still in place, and no need to abandon it after one bad day.  I can always adjust by shorting some Bull ETFs, but I prefer the Bear in most instances.

A couple reasons for that.  One, the market has an upward bias.  Companies make money, and their value generally increases over time, along with the stock price and inflation has an impact.  There is also a technical feature of these ETFs that favors the Bull side.  More on that later.

These ETFs (both sides) also decay faster if there is more volatility.  I’ll write a blog post about that someday. 

For now, don’t follow my positions blindly (look at today) and nothing is for sale here.

Here are today’s positions, no changes. 

	Close	Initial Short	Gain (Losss)
NUGT	10.21	10.47	0.26
BIS	30.08	29.75	(0.33)
TZA	9.85	9.90	0.05
VIXM	55.13	54.60	(0.53)
RUSS	36.99	30.40	(6.59)
CORN	23.34	22.68	(0.66)
FAZ	11.51	11.45	(0.06)
UVXY	42.21	40.68	(1.53)
FXP	27.54	27.58	0.04

Why I am Short $NUGT the 3X Gold Miners ETF

If you have followed along with previous posts (or looked at the title of this blog) you know that I am shorting leveraged ETFs.  The primary reason is that by leveraging and daily rebalancing, these ETFs are set up to fail over the long term.  One of the positions I took a week ago was a short position in $NUGT, the Direxion Daily Gold Minors Index Bull ETF. 

Like the other ETFs I have shorted ($TZA, $FAZ and $RUSS) this is a daily rebalanced fund that is designed to move three times (300%) of another underlying fund or index,  In this case, the $GDX.  Unlike the others, this time I have shorted the Bull ETF, not the Bear ETF, which is $DUST.  The quick reason is that I couldn’t borrow any $DUST to short, and haven’t been able to for a long time.  Maybe you can, or maybe I could if I was willing to pay a fee, which I am not.  

The longer reason is that the miners are different from a lot of stocks.  Most of the stocks and indices are fairly well correlated to each other.  For instance, if the Dow goes up, the S&P does, as does the NASDAQ, and vice versa.  The miners are more closely correlated to the price of gold, however.  I am sure someone can produce studies to prove and disprove this, but, it’s pretty obvious if follow it.  Not perfectly correlated, but pretty much. 

So, if you believe gold prices are in decline, it makes more sense to short the bull here, rather than the bear.  But, as with any of these leveraged ETFs, in the long run, both are likely to decay compared to the underlying index.  To wit, so far this year:

$GDX is up 9.41%

$NUGT is up 9.35%

$DUST is down 41.85%

Any questions?  By the way, the Junior Miners are even more volatile.  More on them later if I open a position there.  

One other point I will hit in greater detail in another post:  Entrances matter.

No advice here, just providing information, do you own due diligence, yada yada yada,

Here’s how my positions are doing end of day (and yes, I had a good day):

	Close	Initial Short	Gain (Losss)
NUGT	10.70	10.47	(0.23)
BIS	29.72	29.75	0.03
TZA	9.59	9.90	0.31
VIXM	54.62	54.60	(0.02)
RUSS	32.59	30.40	(2.19)
CORN	23.10	22.68	(0.42)
FAZ	11.26	11.45	0.19
UVXY	39.54	40.68	1.14
FXP	27.20	27.58	0.38

Why I am short $RUSS

$RUSS is the Direxion Russia Bear 3x ETF.  It trades on a daily basis as the opposite of $RUSL (the bull 3x ETF).  $RUSL is designed to move at 300% of the Russia stock market in the form of the $RSX ETF.

As I mentioned before on $FAZ and $TZA, this works on a daily basis, and not over an extended time.  I shorted $RUSS a few days ago at $30.40 (in US dollars of course) not because I have any idea about the Russian economy or stock market, but because these 3x ETFs are designed to fail over time.   It’s not just an opinion, it’s the way they are built. 

It doesn’t mean they can’t go up for a while, so a longer term horizon is beneficial.  Looking back at 2015 year to date:

$RSX is up 34.65%

$RUSL is  up 92.81%

$RUSS is down 73.4%

It’s not that $RUSL isn’t a good candidate for a short after this giant gain, I just think $RUSS is still better.  If you recall, last year there were big concerns after the Russian annexation of the Crimea, and a resulting plunge in their stock market.  It has made a nice comeback this year, hence, the big drop in $RUSS.

$RUSS is pretty volatile, which makes for more decay in these ETFs.  The ETF has moved more than 12% up and down in a few days. More on decay in another post.

Updated quotes and my initial position below.  You may note that I added a new position, $FXP.  More on that another day.

	Close	Initial Short	Gain (Losss)
NUGT	11.38	10.47	(0.91)
BIS	29.95	29.75	(0.20)
TZA	9.88	9.90	0.02
VIXM	54.69	54.60	(0.09)
RUSS	29.94	30.40	0.46
CORN	23.05	22.68	(0.37)
FAZ	11.48	11.45	(0.03)
UVXY	40.98	40.68	(0.30)
FXP	27.61	27.58	(0.03)

In case you wondering, this isn’t advice or an offer to purchase anything.  Just what I am doing.  

Why I Shorted $TZA, the Inverse Small Cap ETF

A few days ago I sold short $TZA, which is the Direxion Daily Small Cap Bear 3x ETF.  This is the inverse of $TNA, which is designed to mimic 300% of an index of small cap stocks, pretty much equivalent to the $IWM.

If the $IWM goes up, $TZA does down three times as much on a daily basis.

Over the long term, that relationship doesn't work.  So far this year, $IWM is up $1.62%, $TNA is up 2.2%, but $TZA is down 10%.  Which is why I am shorting it.  Over the long haul, the short is likely to work out.  Not to say that it can't spike if the underlying $IWM drops suddenly.  But all investing has some risk.

I call this swimming downstream. More on that later.

This is the full listing of the positions in my account at today's close, with the opening price when I shorted them. I'll discuss each of them over time.

	Close	Initial Short	Gain (Loss)
NUGT	10.88	10.47	(0.41)
BIS	29.75	29.75	-
TZA	9.93	9.90	(0.03)
VIXM	54.23	54.60	0.37
RUSS	34.18	30.40	(3.78)
CORN	22.67	22.68	0.01
FAZ	11.50	11.45	(0.05)
UVXY	39.70	40.68	0.98