An entire host of leveraged ETFs collapsed during the recent decline and are either being delisted or are facing mandatory redemption.
See the details in this article by Lara Crigger at www.ETF.com. Figure 1 displays a partial list from her article.
Figure 1 – Leveraged ETFs that are ceasing trading (Courtesy: www.ETF.com)
In reality, this should not come as a surprise and additionally can serve as an important lesson going forward.
Many of these funds were designed to offer extremely high yields. I won’t even get into the mechanics since they are mostly moot now. But for example, a month or two ago tickers like CEFL and MORL were purportedly offering yields close to 20%, which made them fairly intriguing to investors seeking income. But in a world of low interest rates it seemed almost too good to be true. Or in this case, too good to be true, period.
I have to admit that as a trader always “looking for an edge” I was long intrigued by many of the tickers on the list in Crigger’s linked article and spent a fair amount of time trying to quantify the risks.
But I never quite pulled the trigger. The only reason being – I just could never wrap my head around what the true risk was with these things, i.e., “what’s the worst thing that can happen?”
Well now we know.
The Lesson
At times, extremely unique and potentially lucrative opportunities exist (for example, see Here, here, here and here) and a trader may feel both intrigued and wary all at once. Here is the key:
Before acting you MUST ask and answer the following questions:
“How much am I willing to risk?”
“What is my worst-case scenario?”
“Can I live with it, if the worst-case scenario unfolds?”
Until you can satisfactorily answer those questions, DO NOT CLICK “TRADE”!
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented does not represent the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
