Replies to post #43640 on A.I.M. Users Bulletin Board (AIMUSERS)

[AIMStudent]

Thanks Adam. Understand expense ratios eat into gains, especially long term. I'm just trying to put all the AIM pieces together and was looking for examples with ultra high Betas to test against.

[ls7550]

I've never used leveraged ETFs, but first thing I check is the expense ratio and the three have expense ratio of around 1 to 1.5%

Leveraged ETF's typically leverage up the volatility, not the compounded rewards. If you hold a 2x leverage fund then generally you should only be looking to invest half as much in that as you would the 1x.

Example

On that basis a 1% fee for a 2x equates to a 0.5%, as does a 1.5% fee on a 3x (that you'd invest a third of the amount in compared to the 1x).

If/when you hold more exposure then compounding works against you. For example if the 1x drops 25%, rises 33% ... so back to break-even, then the 2x might drop 50%, rise 66% and be -17% down.

I use/hold leveraged ETF's and do so primarily for tax efficiencies i.e. I can avoid dividend taxes that I'd otherwise incur. It's also a means to play the 'cash' side, i.e. if you achieve a return on 'cash' that exceeds what the leveraged fund incurs (borrows) in order to leverage positions, then you're net up overall.

Compare this for example to the one posted above

There's also a element of safety in holding leveraged funds. A third of the amount in a 3x, the remainder in government treasuries (as good as safe/guaranteed), and your maximum loss is (less than) 33.3% (compared to 100% potential loss if fully invested in a 1x fund that collapses).