"SOAR"

[rffrydr]

100X leveraged to the NAZ on its way--it's a brave new world.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Crude may be pressing highs....but not this crude:

http://stockcharts.com/h-sc/ui?s=OIL&p=W&b=5&g=0&id=p47029145252
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Today is the Tomorrow you worried about Yesterday!

[nodoodahs]

Speaking of rebalancing leverage, the good folks at ProShares provided this information on how to use their ETFs over longer timeframes:
http://www.indexuniverse.com/docs/JOIWebcastv1591609Final_DN.pdf
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[nodoodahs]

I apologize for incorrectly over-simplifying the impact of leverage. It's VERY path-dependent, as well as dependent upon the timing of both the rebalancing and the measurements of return.

Take the return stream for the SPY, annually from 10/30/96 through 11/05/09, with prices back-adjusted for the impact of dividends (source: Yahoo!Finance), as an example.

Annual stats on a cash basis are average 6.83%, standard deviation 19.62%, compounding 4.91%, and Sharpe at zero risk free is 0.35. The first year returns 33.2% and the last year returns 14.0%.

Let's assume that you borrow, with no interest or transaction costs, 1/2 of the original purchase, and pay it back at the end. Your first year's return is now +166.4%, because you got 100% on your money to start! Your last year now becomes a loss, -16.6%, because you pay back your original principle. The leverage STARTS at 2:1 but fades as you compound, with an ending leverage of 1.37:1. This is not unlike a no-money-down buyer of a house getting “equity” and a different loan-to-value ratio as the appraised value of the house goes up. Annual stats on an INITIAL leverage basis of 2:1 are average 14.73%, standard deviation 49.23% (heavily influenced by the first year), compounding is a mighty 8.03%, and Sharpe at zero risk free is 0.30. Note that the initial 2:1 leverage did NOT double the annualized compounding rate.

Now let's assume that you borrow, with no interest or transaction costs, 1/2 of the original purchase, and after each and every year, you borrow additional funds (or add funds) in order to keep the leverage balanced at 2:1 for the start of each year. NOW we have what is typically described in academe as the leveraged return. In this case, the average return and standard deviation both are double the unleveraged return, 13.66% and 39.25%, respectively, and the Sharpe at risk free of zero is identical to the unleveraged version, at 0.35. However! The compounding rate DROPS to 4.43% annualized, primarily because this method lost -70.81% from 11/06/07 to 11/05/08. It's interesting to note that the annually-rebalanced stream actually has an annualized compounding rate that is ABOVE that of the cash option for most of the 13 years measured, finally falling below the cash option's compounding rate in the last two years.

I'll leave the theoretical exercise of generating rebalanced 2:1 leverage on a monthly, weekly, or daily basis for the curious to work out.

The key points are that leverage varies over time with the return of the underlying issue, and the return characteristics of the leveraged strategy are not only path-dependent, but dependent on the rebalancing interval and the interval upon which returns are measured.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[rffrydr]

[nodoodahs]

Barclay's launches a series of ETNs with no rebalancing of leverage.

http://www.indexuniverse.com/sections/features/6898-barclays-capital-etn-notes-cool-or-just-crazy.html?Itemid=5

Quite the opposite from daily rebalancing, eh?

Note that if the intervals between rebalancing of leverage do not coincide with the measurements used to calculate the Sharpe ratio, then the old adage that "zero-RF Sharpes are indifferent to leverage" is patently FALSE.

Also note that, unless the variance of daily returns is exactly zero, leverage has a non-linear relationship (with declining slope) to the compounded growth of the investment.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[nodoodahs]

http://www.nera.com/image/PUB_ETF_Leveraged_1009_web.pdf
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[rffrydr]

Picked up on it down the daisy-chain but wouldn't be surprised if there is a strong underlying demand to straddle the taxman. Anyone wanna start a new ETF by the name of IRS?
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Turns out it was a hoax but it looks like many "investors" were willing to jump on board:

http://www.jasonkelly.com/2009/11/investors-will-buy-anything.html

[rffrydr]

Just what we need: "...efficient way to vaporize some of the year's profits."

Does underscore the government presence in every move we make.
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Today is the Tomorrow you worried about Yesterday!

[nodoodahs]

Henry: I edited your comment to direct to Jason's site rather than to the aggregator. Give the original author some love!
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[HenryTo]

More details:

http://www.jasonkelly.com/2009/11/first-100x-leveraged-etfs.html