Ray,
In this post, I want to discuss the pricing of Index ETFs.
Index ETFs, like IWM (Russell 2000) or SPY (S&P 500) are priced as a fraction of the underlying Index (in these two instances, 1/10 of the Index value). Their prices have nothing at all to do with the normal Supply/Demand price structure -- that is taken care of in the value placed on the Index, along with the appropriate "weighting". The SEC requires the Index provider to generate its value every 15 seconds during the trading day, and these basic ETFs must readjust their price to conform. This means that the volume of trading for IWM or SPY has absolutely no bearing on its price. The price is adjusted 1560 times during the normal trading day -- any slippage is taken care of then.
However, the basic price structure of the Inverse and Leveraged ETF versions is quite different. The issuer arbitrarily decides on the price so that it (the price) can move up or down as needed to reflect the purpose of that ETF. That is why they will often have Splits or Reverse Splits to put the issue back into a medium price range. The pricing of these ETFs is not based on the PRICE of the Index, but the movement in price. And this is where your statements about % gains or losses is appropriate -- it gives the correct impression. These instruments connect their price movements to the % change in price of the underlying Index -- not the actual dollars and cents of a price rise or drop.
Not withstanding my remarks in the other post, I also tend to agree with your caution about using Inverse ETFs, Leveraged or Non-Leveraged, as a cash pool, especially when beginning a new AIM position. We don't know where the market is going to go from here on, and neither does AIM. We can look at a graph of the past action and see that it has been in an Up Trend or a Down Trend, until now, but we don't know what tomorrow will bring. Also AIM cannot determine that either until some time has passed. So, my thinking would be to just use ordinary Cash instruments until AIM proves to you, by generating sales, that the trend is Up, and then put the sales cash into the Inverse ETF. That way you can "work into" the position and not be "overexposed".
Regards,
Bob
AI
