Frequently Asked Questions

Dr K Market Direction Model
For the leveraged ETFs, I have read over the past year that these are tricky to use over the long term since they reset daily and have some tracking problems.

Q: For the leveraged ETF’s, I have read over the past year that these are tricky to use over the long term since they reset daily and have some tracking problems. How does that factor into how the system trades?

 

A: Leveraged ETFs used to have larger tracking errors. This inefficiency has largely been exploited so today's leveraged ETFs have far less tracking error than leveraged ETFs that traded a year ago. For example, the model's buy signal on 3/1/10 on TNA scored a 34.1% gain when it was sold at the time the model switched to a sell signal on 4/19/10. TNA is 3x the Russell 2000 index. By comparison, the Russell 2000 was up 11.2% during this period, so an investor who bought TNA made roughly 3x the Russell 2000 (as opposed to earlier times when the returns would be less than 3x the Russell 2000). Of course, if one wanted to have no tracking error, it would be fine to just use margin on a 1x ETF. However, that would tie up ones capital so investments in individual stocks could not be made. The tracking error is small enough that buying a 2x or 3x ETF in today's market is a viable option.


Published: Aug 31 2010