Long Term Leverage Oil ETF

[MikiMak 0]

I recently purchased  a leverage ETF x2 Bull and was hopping to hold it for the long run when oil price will recover. Any thoughts on this? Will the gains from the prices recovering outweigh the consequences of volatility and daily resets? Still learning about investing and was hoppinh to get some opinions on this. The ticker is HOU and it is listed on the TSX. 

https://web.tmxmoney.com/quote.php?qm_symbol=HOU

[Sonoutlaw 0]

I have been trading it’s sibling HOD . Seldom have I held it overnight in the past two weeks. I feel that WTI could creep down to $15, but beware any policy announcements from Trump that could pop it up temporarily. If he announces import tariffs, that would push it up for a few days... but the demand isn’t there, so back down it would go. I may jump into HOU if WTI gets down to 15, as I think Trump will start tweeting his ideas to prop it up, which will then spur futures traders to prop it up. 

Edited April 16, 2020 by Sonoutlaw

[MikiMak 0]

22 minutes ago, Sonoutlaw said:

I have been 

You’ve been buying leverage ETFs to hold for the long run?

Edited April 16, 2020 by MikiMak

[MikiMak 0]

23 minutes ago, Sonoutlaw said:

I have been trading it’s sibling HOD . Seldom have I held it overnight in the past two weeks. I feel that WTI could creep down to $15, but beware any policy announcements from Trump that could pop it up temporarily. If he announces import tariffs, that would push it up for a few days... but the demand isn’t there, so back down it would go. I may jump into HOU if WTI gets down to 15, as I think Trump will start tweeting his ideas to prop it up, which will then spur futures traders to prop it up. 

I see. I’m assuming trying to hold these oil leverage ETFs for the long term are a bad idea... might just sell my position and cut my losses and try and make it back with HOD as it seems that it’s headed to $10 

[Mohsin Sheikh 0]

what will be the oil future how and when it will rise its still in the range of 20 $ need a perfect sugggestion 

[Bob_W + 37]

Hi MikiMak, I was wondering the same thing.  Here's an article I found explaining, simple enough for even me to understand, why leveraged oil ETFs are not suitable for long term buy-and-hold positions.

https://www.etf.com/sections/features-and-news/dont-buy-and-hold-leveraged-etfs?nopaging=1

I avoid leveraged products anyway simply because I don't know the complex process well enough to understand the risks.

 

[MikiMak 0]

1 minute ago, Bob_W said:

Hi MikiMak, I was wondering the same thing.  Here's an article I found explaining, simple enough for even me to understand, why leveraged oil ETFs are not suitable for long term buy-and-hold positions.

https://www.etf.com/sections/features-and-news/dont-buy-and-hold-leveraged-etfs?nopaging=1

I avoid leveraged products anyway simply because I don't know the complex process well enough to understand the risks.

 

very well said i need to do more research before diving into products like this.

[Ernst Reim + 33]

I am not sure why everybody is so critical about leveraged ETFs for long-term trading? Yes, they loose money from path dependency, etc. but **if** the index goes up significantly, they pay off even in the long run. (Well, not in a 10-year scenario, but 1-2 years, why not?)

Take the HOU here, for example, which is based on the SOLCCLER. On June 8th 2016 it was at 1486, zig-zaged down to 1070 and returned to that value 1.5 years later on Jan 8th 2018. Then it zigzaged up to 1742 over next 6 months (then down, then even higher, but lets stop here).

Lets assume you would have bought at 1300 somewhere in the plateau period (which is **way** away above the bottom at 1070, I'm not cheating here), e.g. in july 2016 or nov 2016 or oct 2017. You would have made 32-34% from the index alone with an 8-month to 2.1 year hold time. 

If you would have bought HOU at those same dates, you would have made 65% for a 8-month hold time. No suprise in a purely bullish scenario. But even if with the 2-year hold time, i.e. 1.5 years of plateau before the climb, you would have still made 37%, sligthly more than the index. HOU thus always outperformed the pure index **as long as the index did go up in the end**. And I did not use any crystal ball trading with the numbers.

Thus, a 30% increase over 2 years still gave slightly higher returns for the leveraged fund than the index, even though the index dipped down to 18% in this period. A long as my expected returns are **significantly higher** (say about the leverage factor) than I expect the bottom to be, I do not fear holding a leveraged ETF for a year.

(Of course, if you continue to hold until the next bear you are screwed. But if you do not expect the index to go up.... perhaps do not go with a leveraged long ETF?)

Edited April 18, 2020 by Ernst Reim

[MikiMak 0]

25 minutes ago, Ernst Reim said:

I am not sure why everybody is so critical about leveraged ETFs for long-term trading? Yes, they loose money from path dependency, etc. but **if** the index goes up significantly, they pay off even in the long run. (Well, not in a 10-year scenario, but 1-2 years, why not?)

Take the HOU here, for example, which is based on the SOLCCLER. On June 8th 2016 it was at 1486, zig-zaged down to 1070 and returned to that value 1.5 years later on Jan 8th 2018. Then it zigzaged up to 1742 over next 6 months (then down, then even higher, but lets stop here).

Lets assume you would have bought at 1300 somewhere in the plateau period (which is **way** away above the bottom at 1070, I'm not cheating here), e.g. in july 2016 or nov 2016 or oct 2017. You would have made 32-34% from the index alone with an 8-month to 2.1 year hold time. 

If you would have bought HOU at those same dates, you would have made 65% for a 8-month hold time. No suprise in a purely bullish scenario. But even if with the 2-year hold time, i.e. 1.5 years of plateau before the climb, you would have still made 37%, sligthly more than the index. HOU thus always outperformed the pure index **as long as the index did go up in the end**. And I did not use any crystal ball trading with the numbers.

Thus, a 30% increase over 2 years still gave slightly higher returns for the leveraged fund than the index, even though the index dipped down to 18% in this period. A long as my expected returns are **significantly higher** (say about the leverage factor) than I expect the bottom to be, I do not fear holding a leveraged ETF for a year.

(Of course, if you continue to hold until the next bear you are screwed. But if you do not expect the index to go up.... perhaps do not go with a leveraged long ETF?)

You make a very good point. I completely agree with you since we are such a low point, the market will have to go up eventually. Oil demand will come back up with will cause the price to rise quite quickly. What worries me are the hiddens fees of HOU. I just want the gains to be able to cover the daily reset expenses. 

[Bob_W + 37]

Something to think about, Ernst.

[Ernst Reim + 33]

It is not really "hidden fees", but the rollover expenses and interest. Do not forget that a leveraged fond works by using your investment to borrow x times more money. And please do not get me wrong : A leveraged ETF **sucks** if you an index is moving sideways. In the above example I mentioned that the SOLCCLER needed 1.5 years to return in Jan 2018 to the value it had in June 2016. A normal ETF (ignoring contango) would have lost around 1% for management fees over that time. HOU, as a leveraged ETF, would have lost 14% due to path dependency.

Thus, please do not read me going against the very good articles linked above. I just wanted to point out that their conclusion "a leveraged ETF is not something for a buy-and-hold strategy" is not the same as saying "can be held only for days".

Edited April 19, 2020 by Ernst Reim

[MikiMak 0]

17 minutes ago, Ernst Reim said:

It is not really "hidden fees", but the rollover expenses and interest. Do not forget that a leveraged fond works by using your investment to borrow x times more money. And please do not get me wrong : A leveraged ETF **sucks** if you an index is moving sideways. In the above example I mentioned that the SOLCCLER needed 1.5 years to return in Jan 2018 to the value it had in June 2016. A normal ETF (ignoring contango) would have lost around 1% for management fees over that time. HOU, as a leveraged ETF, would have lost 14% due to path dependency.

Thus, please do not read me going against the very good articles linked above. I just wanted to point out that their conclusion "a leveraged ETF is not something for a buy-and-hold strategy" is not the same as saying "can be held only for days".

So basically to sum it up if you use a leverage ETF for long term purposes and it doesn't go your way the loss is significantly higher but if your ETF does do what you predicted then your reward would be significantly higher as well?

[Ernst Reim + 33]

Yes.

Although thinking about it, as an approximation your approach works too. Presume that a 2x leveraged ETF doubles your gains and doubles your losses, but also comes with 10% "hidden" fees. Thus you loose even if the market stays stable and you loose if it gains only slightly.

However it is not really "hidden fees", they are not constant, but related to volatility. If you really need the approximation above, it's better to stay away from leveraged ETFs other than in an "all or nothing" bet (which you should then consider such).

Edited April 19, 2020 by Ernst Reim

[MikiMak 0]

4 minutes ago, Ernst Reim said:

Yes.

Although thinking about it, as an approximation your approach works too. Presume that a 2x leveraged ETF doubles your gains and doubles your losses, but also comes with 10% "hidden" fees. Thus you loose even if the market stays stable and you loose if it gains only slightly.

However it is not really "hidden fees", they are not constant, but related to volatility. If you really need the approximation above, it's better to stay away from leveraged ETFs other than in an "all or nothing" bet (which you should then consider such).

Thank you Ernst I really appreciate your help!

[Bob_W + 37]

Take the expense ratio into mind when calculating costs also.  Leveraged ETFs tend to be higher than a straight index ETF.