How To Lose 90% In An ETF Fast

How could you possibly lose 90% in an ETF in less than a year? ETFs are “passive” and “diversified”, right? So, how could a portfolio comprised of several securities and without the tinkering of an active manager lose almost all of its value in short order? It’s actually easier than you think.

This is Your Investment:

(XLF Financials vs. SP - both up 15-20% YTD)

This is Your Investment on Leverage:

(FAZ 3X Daily Short Financials -90% YTD)

(yes, I’m dating myself from those “brain on drugs” commercials). But the message is similarly ominous.

As I outlined visually in much more detail on this triple ETF risk article, even when an underlying index is going your way or flat, due to daily rebalancing, you can actually lose money on both the long and the short leveraged ETF - to the tune of more than half your money in both the long or short side. And, if the trend isn’t going your way? Forget it - you’re out MORE than 3x. Note here how XLF (XLF), the underlying Financial sector ETF was only up 20% on the year, yet FAZ (FAZ), the 3X short Financial ETF was down 90%? 20% * -3 = -60%. That’s what new investors assume when they come upon these leveraged ETFs (full leveraged ETF Ticker list). Even upon reading the prospectus, what does “daily rebalancing” really mean to a neophyte? Hopefully, articles like this will help shed some light on the dangers of holding these ticking timebombs more than a couple days.

Now, granted, the Financials have been extremely volatile and if you think there’s a range bound ETF to trade, like perhaps shorting treasuries or playing the weak dollar with currency ETFs, there are leveraged instruments to jump on a trend, but I just don’t think most retail investors are going to hit the sweetspot on entry/exit.

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