Despite the fact that most leveraged and inversely leveraged ETPs are designed to be held for a single trading session, many investors still hold the products for multiple trading periods. This can often result in performances that deviate significantly from the underlying and can cause huge losses when markets are oscillating wildly, thanks to the daily resetting feature inherent in most leveraged ETFs (for more on this read Understanding Leveraged ETFs). This was especially the case in 2011 as pretty much all corners of the market saw huge swings on a nearly daily basis, pushing many leveraged ETFs to incredible losses on the year.
Yet even among these securities, there was a pretty wide distribution in terms of performance. Some managed to surge higher on the year—such as those in the Treasury and defensive equity sector spaces-- while most others finished the year sharply lower with the biggest losers ending the year down at least 60% from their starting point in January. Thanks to these huge losses in some of the popular leveraged ETFs, it is worth noting how dangerous holding these products over the long term can be in a portfolio. In light of this, we take a closer look at three of the biggest losers in the leveraged ETF world over the course of 2011:
This fund looks to give investors exposure to the MSCI Emerging Markets Index with 300% leverage on a daily basis. This is the same index as popular unleveraged emerging market funds such as VWO or EEM which have lost about 21.5% in the same time period. It is worth noting that the fund was pretty solid during the first part of the year but then proceeded to lose roughly half of its value during the tumultuous period of late July and early August. EDC never recovered after this significant blow, and continued to trend lower throughout the rest of the year (also read Top Three BRIC ETFs).
INDL tracks 300% of the daily performance of the Indus India Index a benchmark of 50 large cap companies based in India. The fund has been on a slow decline for much of the year, much like other Indian securities which have been ravaged by inflation and slowdown fears. In fact, the unleveraged India Small Cap ETF (NYSEArca:SCIF - News) lost 55.7% in the time period despite tracking just a 1x benchmark. Interestingly, INDL was actually a 2x fund for much of the year—it switched over on the first of December-- so its inclusion on the list suggests that India really saw some volatile trading for much of the year and that it was an extremely rough period for investors in this region of the world (read India ETFs: Behind The Crash).
This fund tracks 300% of the inverse of the performance of the NYSE 20 Year Plus Treasury Bond Index, giving investors leveraged inverse exposure to the return of American Treasury securities heavily skewed towards debt that matures at least 24 years from now. This is similar, although not identical, to an index employed by ProShares and its unleveraged short bond ETF in the space, TBF. That particular fund has declined by close to 29% on the year suggesting that the ‘decay’ hasn’t been as bad in this segment of the market. Instead, TMV, thanks to the flat nature of Treasury bonds over the past month, has managed to do slightly better than what some might have thought, although this could certainly change if volatility returns to the U.S. Treasury market in 2012 (also see The Best Bond ETF You Have Never Heard Of).
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Author is long VWO.