Related Topics
ETFs
Share This Page         

FAQ: Leveraged and inverse ETFs: What are the risks?

by Editorial Staff
Updated: March 28, 2015

All inverse funds and inverse ETFs suffer from beta slippage because they all track a certain market on a percent change basis. The greater the leverage and volatility, the greater the slippage. Bob Prechter explained this in his August 5, 2009, Elliott Wave Theorist:

We receive many emails from subscribers asking specific questions about investing. Some ask about trading in options or futures. In such cases, we cannot respond in good conscience with anything except "don't do it." If someone has to ask about trading leveraged vehicles, he is probably not qualified to do so. Another person asks, "Is it O.K. to invest in the ProFunds or Rydex short funds if that is my only short-side option?" Again, given the market-tracking mechanics of such funds, the only answer we can give in good conscience is "no." Buying such funds exposes the investor to the potentially dangerous problem of volatility slippage, whereby the market takes a particular herky-jerky path to lower prices that can drain money from an account every other time prices are re-set, which is typically once or twice a day. As a result of continual resets, such funds demonstrably fail to track the market long term.

"Peak Oil" -- And Other Ways Crude Oil Fooled Almost Everyone

Remember "Peak Oil"? About ten years ago, it was a hugely popular theory "explaining" why oil prices would only go higher. They didn't. This free resource highlights the flaws in the conventional approach to forecasting oil prices and how you can avoid them.

New Signs That the Glorious Era of ETFs is on Shaky Ground

Marijuana ETF Confirms a Long Standing Socionomic Forecast

Learn to Recognize a Popular Old School Chart Pattern

Crude Oil's Trend: Are You "Bathed in Confusion," Too?

FAQ: Leveraged and inverse ETFs: What are the risks?

Learn the Basics of Corrective Waves