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Top 10 Leveraged Long Short Alternative ETFs

Our goal in this profile is to help investors wade through the many competing ETF offerings available. Using our long experience as an ETF publication, and nearly 40 years in the investment business, we can help select those ETFs that matter and may or may not be repetitive. The result is a more manageable list of issues from which to view and make selections.

Leveraged issues have been the subject of great controversy. Some believe, mistakenly in our opinion that short leveraged products particularly were in some ways responsible for enhancing stock market declines during the 2008 bear market. These views are mistaken since there were many other products (options and futures) that allowed investors to short major market indexes.  More significantly are tracking inefficiencies occasioned by both high periods of volatility and compounding problems which can mislead investors in believing these issues don't do their job. We've written about these issues previously as noted in this article .

One thing remains clear when dealing with leveraged issues of all types--they must be traded. Investors wishing to participate in these issues must understand the higher risks associated with these including tracking issues cited above. Investors must be sophisticated and experienced in dealing strategies and products that inherently possess higher risks. We have found that successfully dealing in these requires a technically-based approach.

Leveraged issues can help investors hedge and catch-up with markets if investors feel late to a rapidly developing trend. In the latter case, investors can make-up ground quickly and then convert to the unleveraged ETF.

We're not ranking these ETFs favoring one over another so don't let the listing order mislead you. Although we may use some of these in ETF Digest portfolios it's not our intention to recommend one over another.

ProShares and DirexionShares dominate the offerings in this category. The following charts are based on weekly presentations featuring 22 period moving averages, a Relative Strength indicator and conventional MACD moving averages. Not shown but perhaps referred to are Tom DeMark indicators which we use in conjunction with other proprietary indicators to determine our positions.

 

The most important thing to know about leveraged issues is they must be managed actively. Given index tracking and compounding issues it's hard to sit on a position in a buy and hold fashion unless the trends are both strong and durable. This is of course impossible to know initially.

 

To determine positions it is often most useful to track the relevant indexes and/or conventional ETFs to which these leveraged products are linked versus these issues alone. Often erratic behavior of the leveraged issues can alter what might ordinarily be the right position. Further, the best experience in dealing with these issues is to use limit orders when engaging in them and keying those off the underlying indexes. Therefore, it's important in our opinion to remember to remain disciplined and systematic in using these issues.

 

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