Hi Tf,
Have been thinking about how to answer this so that it makes sense. I think I will answer the last question first.
DSLV is a 3X leveraged inverse etf. I am not familiar with this fund, however I am familiar with the Direxion family of leveraged etfs. The prospectus for the Direxion family of leveraged etfs clearly state that these types of etfs are only for "short-term" investments....not to be used as long-term investments.
The problem is the daily "compounding" problem. If a fund drops 10% in value then it requires an 11% increase in value just to get back to breakeven. A 25% value decline requires a 33% increase to get back to breakeven....etc.
With that in mind using any sort of inverse fund as a cash substitute for any lengthy period of time really creates a problem that is hard to correct. Suppose for example someone had bought a 3X leveraged inverse etf for the S&P 500...SPXS...on January 2nd of this year for a cash substitute.
This etf had a 5:1 reverse stock split at the end of August. So, its adjusted close at the first of the year was $78.20. Yesterday it closed at $36.77. This is a decline of $41.43 per share, or -52.9%. However, it will need an increase of +112.67% just to get back to breakeven.
Assume an investor who had bought this etf at the beginning of this year did so because he thought the market was overvalued and oversold. Assume that the market currently begins an extended correction or decline....goes into a bear market. The investor was correct in his assumption, but terribly wrong in his timing. Not only will his current investments go down in value, but the cash he had set aside to make purchases when his downside targets are hit is only a fraction of what it had previously been.
So, IMO, inverse funds...leveraged or not....are terrible holdings as a long-term cash substitute.
On the other hand, they can be great a short-term holding, which is their purpose. They can be really good investments to use during corrections or bear market declines....just like buying Put options. IMO, they should also had a "finite" life just like an option. IMO, the investor treat them just like a Put option which expires in a month or so. The investor should always be thinking about selling an inverse fund immediately after his profit target is met. If the market turns against the inverse fund or etf and starts gaining then it should be sold immediately. As we know, when a market goes into a serious bear market decline it usually does so in a violent quick manner. Unlike a bull market which takes a much longer time period to develop.
Getting back to SLW. Looking at a chart of SLW and how far it has declined there is no way I would now hedge it with an inverse fund. The time to do that was about a year ago when SLW was around $40 a share....now it is around $19.40. At the time SLW was selling for around $40 a share DSLV was then selling for approximately $20 a share. DSLV has since tripled in value and currently selling for almost $60 a share, while SLW has lost about 50% of its value. If it were me I would wait until SLW has some extended gains before I would consider hedging it with DSLV.
These are just my opinions.
Best regards,
Ray
AI
