Why you invest in GDX or good miners instead of NUGT unless a one day trade
The problem with holding triple-leveraged ETFs in your portfolio
Leveraged ETFs tend to have above-average expense ratios (fees), and that is certainly the case with the ETFs I mentioned above, although I wouldn't necessarily call the fees excessive. Besides, the fees aren't the reason most investors should avoid leveraged ETFs.
Here's the problem. Notice the key word "daily" that appears in all three fund descriptions. Triple-leveraged ETFs typically produce triple the daily return of the underlying index/investment. You might think that this would produce triple the return of the index over long periods of time, but mathematically, this is simply not the case.
Consider this simplified example. Let's say that a certain stock index that starts at $100 falls by 20% on the first day (now $80), rallies by 20% on the second day (now $96), and then falls by 25% on the third day (now $72). Overall, this produces a net loss of 28% for the three-day period.
A triple-leveraged ETF tracking the same index would fall by 60% on the first day (now $40), rise by 60% on the second day (now $64), and drop by 75% on the third day (now $16). This translates to a three-day loss of 84%, which is exactly three times the loss of the index. No big surprise yet.
The problem is what these loss percentages mean. In the first case, the non-leveraged ETF would have to rise by 39% to get you back to even. On the other hand, the leveraged ETF would have to rally by a staggering 525% just to break even.
Again, this is a simplified example, but mathematically, the point is that declines in the index have a more devastating effect on the long-term performance of leveraged ETFs, essentially creating a negative bias over time (unless the index goes straight up forever). In other words, these funds rarely, if ever, match triple their index's performance over long time periods.
