Have tried this in the past with mixed results.
To echo what Toofuzzy and Steve said, what I have found is that the shorter the time period used, the better the gains and losses mirrored correlation match. The longer the time period used, the gains and losses lose a lot of the mirrored correlation matching.
I am not really good with numbers, but, as discussed numerous times previously on this forum, I think there are two reasons for it.
First is that from a percentage standpoint it takes a larger percentage gain to make up for the percentage loss than the percentage loss itself. By that I mean that it takes a 11.11% gain to make up a 10% loss. It takes a 33% gain to make up a 25% loss; it takes a 100% gain to make up a 50% loss, etc.
Second is my understanding that these leveraged ETFs, long and short, rebalance every day. The prospectuses for these leveraged ETFs do a good job of explaining how this works. In fact, the Direxion prospectus for their 300% leveraged ETFs says that these leveraged ETFs are useful only for short-term trading……too risky to be a good long-term holding.
If one goes over to StockCharts and use their PerfCharts tool to make some comparisons, the difference between the short-term results and long-term results becomes apparent.
Perfcharts shows the following for QLD and QID:
1 week…..QLD -5.01% QID +4.9%
30 days…..QLD +3.3% QID -3.9%
180 days….QLD +48.4% QID -38.4%
365 days…..QLD +167.3% QID -77.2%
I would make two suggestions:
First, do not use this strategy with leveraged ETFs because of the daily rebalancing aspect. Use this strategy only with unleveraged ETFS, like QQQQ and PSQ. Even then, the first reason I gave; it takes a larger percentage gain to make up the percentage gain loss, distorts the mirrored correlation match the longer these funds are held.
Second would be my suggestion that you should rebalance on small percentages…..no greater than 5%.....to keep the mirrored correlation as close as possible. Even at 5% or lower rebalancing, you have to consider the commissions and the bid/ask slippage. Otherwise, you can really get frustrated on larger percentage rebalancing, believe me.
I have tried this strategy several different ways and have come to the conclusion that doesn’t work for me. Now whenever I use an inverse ETF, leveraged or unleveraged, I use it only as a short-term hedge in order to hedge my long positions whenever I feel the market has been in a very overbought condition for a long period of time….like now.
Just throwing this out for whatever it might be worth to you.
Ray
