3x ETFs: Do they perform better than regular ETFs?

By Lawrence G. McMillan

At our most recent live seminar, in Las Vegas, a suggestion was made to analyze the performance of the “3 times” ETFs versus the regular underlying ETF.  Furthermore, what are the ramifications for option traders?  These questions – while simple on the surface – turned out to be rather complex.  So, to answer them is going to take more than one feature article.  This is the first of those.  At this time, we are going to look at the performance of the ETFs and lay out some general trading strategies.  In the next article (which may not occur until January, because of annual Forecast Issue and then the Performance Review Issue), we’ll concentrate more on option strategies that might be profitable, building on the research presented in this article.

Background

In mid-2006, Proshares introduced some ETFs that were designed to move at double the speed of the underlying ETF.  They also introduced “inverse” ETFs – designed to be the equivalent of being short the ETF (these are also called “Ultra” ETFs by certain vendors).  Over the years, a lot of double and inverse ETFs have been issued by mainly three companies: Proshares, Velocityshares, and FactorShares...