Leveraged Etfs Can Bite in Unexpected Ways

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Leveraged Etf's are relative newcomers to the investment arena, and are designed for traders, not buy and holders. Here's why:

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Leveraged Etfs Can Bite in Unexpected Ways

  1. 1. This chart further illustrates the effect of daily compounding and volatile markets.  From January 1 to April 14, 2009 the Russell 1000 Financial Services Index was down 15%.  The Bull 3X Financial ETF (ticker FAS) and the Bear 3X Financial ETF (FAZ) track the index in opposite directions.  At the end of the period both ETFs were down 69.2%.  An investor who correctly predicted the 15% decline in the sector and purchased the triple Bear ETF would have lost 69.2%! Because the performance of leveraged and inverse ETFs can quickly diverge from the performance of the underlying index, it is possible to suffer significant losses even if the long‐term performance of the index showed a gain.  Because these products could have a significant impact on the performance of a client’s portfolio, representatives need to consider the client’s investment objectives and tolerance for risk, and also the portfolio’s allocation to these types of products.  Leveraged and inverse ETFs should be actively monitored, as frequently as daily, and are generally not appropriate as an intermediate or long term holding.     Financial Bear 3X Shares (FAZ) Financial Bull 3X Shares (FAS) 200.00% 200.00% 150.00% 150.00% 100.00% 100.00% 50.00% 50.00% 0.00% 0.00% -50.00% -50.00% -100.00% -100.00% Jan Feb Mar Apr

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