Monday, April 27, 2009

The Hazards of Double & Triple Inverse ETFs

I found a great Kiplinger Finance article via the blog Money Crashers. The article is about Inverse ETFs and how they may be "hazardous to your wealth." I have owned the double inverse Dow ETF and have enjoyed reasonable results. However, results vary and you don't get exactly what you expect. An excellent point is made in the article:

Real estate investment trusts have performed hideously over the past year. The Vanguard REIT Index fund tumbled 50% through April 7. Now, suppose you were smart enough to buy a fund that goes in the opposite direction of the Vanguard fund, namely ProFunds Short Real Estate fund. Its objective is to return the inverse of a REIT index. Your gain: Not 50%. Not even 25%. Instead, you lost 11%.

The article goes on to emphasize that these inverse funds don't target equal inverse returns over a month or year, but over a DAY! Additionally, the longer you hold onto these funds the worse your returns tend to be:
The longer you invest in a leveraged fund the more likely you are to lose money, warns Morningstar analyst Paul Justice. With these investments, time doesn't heal; it destroys. "It's an absolute fool's game," he says. "Unfortunately, there's a great swath of investors and even some financial advisers who think they can time the market with these funds. They're touted on CNBC all the time."

For the full article click here. Thank you Money Crashers for the good article find. I learned a bit today.

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