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Trading Leveraged ETFs: Dave's Midday

Generally speaking we use leveraged issues for trading purposes in Dave's Special Portfolio (DSP) at the ETF Digest

We're a proponent of using these issues tactically mindful that these issues compound daily.  Investors should do their homework on this aspect before using them. 

To accomplish satisfactory or superior performance, we use weekly/daily charts for DSP as they accommodate the unique aspects of these issues. Many day traders opt for intraday or shorter-term time views. 

The important factor is to key all our activity directly to the index and/or unleveraged ETF rather than the leveraged issue. Therefore, if we have an actionable signal for the S&P 500 Index, our decision is based on the behavior of SPY and the index rather than UPRO (ProShares 3 X Leveraged Bull ETF) or SPXU (ProShares 3 X Leveraged Bear ETF).

Liquidity considerations drive the next level of selection. After all, good trading and execution characteristics are essential to success. Remember, newer issues, no matter how seductive they may seem, need to build a following and this is especially true for retail investors and financial advisors who lack the capacity to create new shares in 50-100K share increments.

Occasionally, a new leveraged issue will come to market with little history but meet with strong initial demand due to a linkage to a popular index where there is little competition. Commodity and currency issues are common examples and can be overlooked, but important sectors.

Let's look at popular FAZ compared to XLF in both weekly and daily formats with data from roughly 11 AM today.

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SYM TRADE IT LAST %CHG
SPXU $33.72 1.23%
UPRO $141.69 -1.30%
SPY $210.77 -0.42%
XLF $24.26 -0.08%
FAZ $12.21 1.00%

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DOW 18,037.97 -42.17 -0.23%
S&P 500 2,108.92 -8.77 -0.41%
NASDAQ 5,060.2460 -31.8390 -0.63%

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