Leveraged ETFs/GDX vs. NUGT
Trader Scott’s Market Blog
January 10, 2017
From this post a few days ago there were several comments – biotechs, gold resistance area, etc. One of them was a general answer to questions about using the leveraged ETFs to position for a bull market in PM miners. You can see the whole comment at the post, but here’s a snippet:
“I purposely use the leveraged ETFs for short term trading, because it forces me to keep it very short term, but not for position trading. I did a “lesson” about how the leveraged ETFs (derivatives basically) underperform the underlying product – in this case GDXvs. NUGT. (I did audio with it, so the lesson may get posted, we’ll see – just experimenting with some things.) And even in the relatively short term, look how they underperform. Just in the last several weeks, they’re already underperforming. But their volatility is great for short term stuff. But on a bigger picture, my view is unchanged. We did get the good rally out of December which I wanted to see, so that is a bit of a “confirmation”/confidence booster. And the much bigger backups in the individual miners are the position buying entry points, with some selling at the big resistance areas.”
All of the leveraged ETFs, not just the PM ones, have the same problem (especially the 3x ETFs, and even more so when the underlying is also very volatile). The problem is the “decay”. The “beauty” of leverage doesn’t come for free, and that is a big performance hindrance over time. They certainly amplify the moves when it is one direction, but the countertrend moves to the main trend really erode prices over time, and the more volatile the underlying, the more the erosion. And you just have to look at those two chartsof GDX and NUGT only over the past several weeks, and NUGT is already underperforming. The DUST ETF shows this situation so well. The miners were in a bear market from 2011 until January 2016 (for the HUI), yet look at what happened to the inverse (bearish) ETFDUST. So yes, the leveraged ETFs are great for very short term trading, OK for a bit longer than that, but horrible over time. And the miners are volatile enough on their own, so for a longer term view they’re great, when bought into the big selling waves.
Trader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day.Scott returned to markets over fifteen years ago where he continues as an independent trader.