Hi G,
I can only answer for myself as to why I wouldn't AIM a 3X Leveraged ETF. It has to do with the "construction" of these Leveraged ETFs and how the issuers handle a falling market. Since the ETF is attempting to duplicate 3X the % gain or loss per day, and is not "tied" to any particular price, the issuers can keep their ETF in the desired price range by performing Stock Splits.
On the way up, this is wonderful because you have many more shares than you originally purchased, and this is what you have seen since 2009. Not just the past 5, or 3, or 1 year(s), 9 years. Essentially, since these 3X ETFs have been in existence. Even so, you can get a "hint" of what is in store by comparing the price of your ETF recommendations on 8/1/2011 to 10/3/2011. Most of them lost between -40% and -65% on what was only a -20% market drop. Another way to "estimate" the damage is to compare the prices of all the available 2X Leveraged ETFs that were available in October 2007 and see how much they fell through March 9, 2009. My tests show that most of them lost from -80% to -95%. 3X would be worse (go broke).
Another problem that I have written about before is that the issuers will never have the price of these ETFs go to $0.00 -- they will simply do a reverse split, that is, when the price gets to some very low level, they will perform a 1:10 split (for instance) and you will have the number of share you own reduced by a factor of 10, but the price per share will now be 10 times higher. Then it falls again and the same process is followed. You don't know ahead of time that the split is coming, nor do you know how big the split will be, so it is difficult to have a number of shares that will be divided evenly. In this case, the number of shares you have is divided by the split number and any "left over" shares are sold out of your account with no input from you and at that very low price.
Want an example? Look at the history of NUGT, a 3X Leveraged ETF for the Gold Miners. Since the peak in 2011, it had a 1:3, 1:5, and (I think) three or four 1:10 Reverse Splits. The price never got below about $2.79, but your shares were gone. You say, I never suggested NUGT for AIMing, but the 2008 Bear Market saw the 2X ETF of SPY (SSO) fall -85%; the 2X of QQQ (QLD) fall -83%; the 2X of the DOW (DDM) fall -82%, etc.
I say, you cannot AIM these ETFs through Bull and Bear markets. Perhaps, if you use the Ocroft method of buying and selling out, with real self-discipline, or if you determine to sell out after a certain, predetermined amount of draw down. I think a person is "playing with fire" to AIM these through thick and thin -- your account will get very thin, IMHO.
Respectfully,
Bob
PS I have enjoyed reading your posts and your site.
AI
