Trading With Inverse and Leveraged ETFs - 190

They promise 2x or even 3x the market's daily returns, but financial advisors warn they are a trap for long-term investors. So what's the real story? This episode offers a personal and unfiltered take on one of the most debated topics in modern finance:

Trading with Inverse and Leveraged ETFs.

We break down how these complex products work and why conventional wisdom says to avoid holding them due to fees and tracking "decay." Hear a personal account of long-term success holding a 3x leveraged ETF (TQQQ), challenging the mainstream advice. We'll also share two critical cautionary tales: one about a hedging strategy gone wrong during the Great Recession, and another on why inverse ETFs are particularly dangerous in bear markets due to "rip your face off rallies."

This is not your typical textbook advice. It's a real-world perspective on the potential and the pitfalls of using these powerful tools. When is the best trade no trade at all? Subscribe for more honest trading insights.

Key Takeaways

• They Offer Magnified Returns and Risks: Leveraged ETFs (like TQQQ) use derivatives to aim for 2x or 3x the daily return of an underlying index, while inverse ETFs aim for the opposite. This magnification works on the downside as well, making them highly volatile instruments.

• Conventional Wisdom Says "Don't Hold Long-Term": Most financial advisors warn against holding these ETFs for more than a day due to the corrosive effect of high fees and daily rebalancing, which can cause their long-term performance to "decay" and not perfectly track the underlying index.

• Personal Experience Can Differ: The host shares his personal, multi-year experience holding the 3x leveraged ETF TQQQ, stating that despite the conventional warnings, it has been his single best-performing holding and has significantly outperformed the underlying NASDAQ index.

• Beware of Inverse ETFs and "Rip Your Face Off Rallies": The host strongly cautions against using inverse ETFs to bet against the market. The reason is that bear markets often contain the most violent, explosive single-day rallies, which can wipe out a short position very quickly.

• The Best Trade Can Be No Trade: A powerful cautionary tale is shared from the 2008 crisis, where trying to hedge by owning both a 2x leveraged ETF and a 2x inverse ETF still resulted in a loss. The lesson: when the market is too wild and you don't know what to do, sitting in cash is often the smartest move.

"The word on the street... is not to hold, not to own a leveraged ETF for the long term... But for me, I've held TQQQ in one account or another for years... and it is the number one best performing holding that I've had."

Timestamped Summary

• (00:44) What are Leveraged and Inverse ETFs?: A clear explanation of how 2x and 3x ETFs work and the derivatives they use to achieve magnified returns.

• (05:15) The Conventional Wisdom vs. Personal Experience: A breakdown of why financial advisors warn against holding these products long-term, contrasted with the host's personal story of multi-year success with TQQQ.

• (08:44) A Hedging Strategy Gone Wrong (Cautionary Tale): Hear the personal story from the Great Recession of buying both a 2x leveraged and 2x inverse ETF, and still losing money, highlighting the instruments' decay.

• (11:15) The Dangers of Inverse ETFs and "Rip Your Face Off Rallies": Learn why betting against the market with inverse ETFs is so risky, especially due to the violent short-squeezes common in bear markets.

• (12:47) Trading Options on Leveraged ETFs: The host's take on why he avoids trading most options strategies on these products, arguing that a covered call defeats the purpose and spreads are better suited for less volatile underlyings.

Do you use leveraged ETFs in your portfolio? Share your experience—good or bad—in the comments. If this episode provided a unique perspective on a complex topic, share it with a friend who trades ETFs. 

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