NEW YORK ( ETF Digest) -- Leveraged issues have been the subject of great controversy. Some believe, mistakenly in our opinion, 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. Critics suggest that since there was and is no "uptick" rule for shorting this enhanced market declines. But, all one had to do was watch a live market streaming tape during the worst of the declines and you would see plenty of upticks with the decline.
Also, critics are more correct to point to presumed tracking inefficiencies. A typical investor would complain after buying one of these products and see a few months later they didn't match the expected two or three times the index or ETF. This was primarily due to longer holding periods when periods of high periods of volatility persisted combined with compounding problems given daily tracking methodologies used by sponsors. We've written more about this in this article. One thing remains clear when dealing with leveraged issues of all types--they must be traded and used tactically. They're not "buy and hold" products, but then neither are alternative products like options or futures. 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 their dealing employing strategies to mitigate higher risks associated with these products. We have found that successfully dealing in these requires a technically-based approach. Leveraged issues can help investors hedge their long exposure tactically using inverse and/or leveraged short issues. Oddly there may be more liquidity in leveraged issue versus -100 inverse issues. Also if an investor senses they missed a long or short move and wished to catch-up to the new trend then a leveraged issue can help them achieve at over a short period. We're not ranking these ETFs favoring one over another so don't let the listing order mislead you. The current list of ETFs may change in the future as based on market ever changing market trends various sectors can wax and wane in liquidity and performance. In other words, whatever sector is "hot" at the moment will attract the assets.Although we may use some of these in ETF Digest portfolios it's not our intention to recommend one over another. That said, generally the easier and more efficient trading is found with those issues offering the best liquidity. In our experience, and given the potential volatility and liquidity concerns "limit orders" are always the best method to insure a more satisfying exposure. ProShares and Direxion Shares 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 positions. DeMark indicators are available to ETF Digest Premium Members. 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. Due to occasional tracking errors caused by high volatility combined with compounding issues it's vital that these products are used for trading purposes--just inspecting the YTD performance data reflects this. As such technical analysis is vital in determining positions in our opinion.