Beta-slippage the natural decay of leveraged ETF's
Leveraged ETF's are born losers in non-trending markets, and are by far the fastest way to ruin your account. The reason, beta-slippage.
To understand beta-slippage, imagine a volatile asset that goes up 30% one day and down 25% the next day. A 2X leveraged ETF goes up 60% the first day and down 50% the next day. On the open of the third day, the underlying asset is back to its initial price:
(1 + 0.3) x (1 - 0.25) = 0,975
And the 2x leveraged ETF?
(1 + 0.6) x (1 - 0.5) = 0.8
The underlying asset has not changed in price, but you've lost almost 20% of your money in the leveraged ETF in a short period of time.
In trending markets however, you can use the beta-slippage in your favour.
When an asset is going up 20% two days in a row.
The asset has gone up 44%:
(1 + 0.2) * (1 + 0.2) = 1.44
The 2x leveraged ETFs is up 96%, more than twice 44%:
(1 + 0.4) * (1 + 0.4) = 1.96
A leveraged ETF in a trending market will outperform the underlying asset by more than its leveraging factor. It depends on the sequence of losses and gains.
Always use a stop loss for every entry and use leveraged ETF's only for the short term and monitor your possition closely or use trailing stops.
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