This blog takes attempts to take out all the noise and attempts to look at the numbers objectively, to try and develop an investment strategy in FAZ or FAS. I'm doing this research myself, so thought I'd share it and post it in other forums to help people figure out the maze.
First the introduction, FAZ and FAS are 3X leveraged ETF's that track the Russell 1000 Financial Services (RGS) Index.
The first thing to note about these ETF's is the leverage. The leverage for these funds is at 3x. There are other ETF's tracking indexes leveraged 2x and other's that are not leveraged at all. The key here is to understand what "leverage" exactly means? Does it mean that for every 1% change in the index, leads to a 3% change in the price of funds? I wasn't too sure and plenty of the forums in these funds elude to buyer beware messages. So let's crunch the numbers and see exactly what it means. (Click the graph)
The first thing to note is that the ETF's inception date was November 7 and if we had bought both funds and held onto it til the present date, we would of lost a great deal on both sides of the coin. As of December 12:
- RIFIN.X (-14.5%)
- FAZ (-39.7%)
- FAS (-53.81%)
- RIFIN.X (-14.5%)
- FAZ (33.5%)
- FAS (-33.5%)
So let's look at the following hypothetical scenario to try and explain what it means to be 3x leveraged and try to explain the above scenario.
So as we see, ultimately, that over time, this fund will lose you money. It gets increasingly more difficult for these funds to get back even, even more so as the RIFIN.X fluctuates up and down. People holding this fund for over 3 days need to keep reading.
STRATEGY FOR PLAYING FAZ OR FAS
Holders beware, do not hold this for over a day in your portfolio for the reasons stated above. This ETF is for day traders only, who can take advantage of a volatile swing in the index in less than 24 hours. There is no reason to hold FAZ or FAS, because ultimately you are betting on multiple day bear or bull rallies. It's a slippery slope, but most of it is downhill if you hold.
On the google forums, fjordl...@gmail.com posted a spreadsheet with FAS and FAZ prices along side the RIFIN.X prices, to illustrate how FAZ and FAS are priced.
If you have any questions about this, just fill out a comment below and I'll get back to you.