Tuesday, September 15, 2009
Shah Gilani is a retired hedge fund manager, recognized expert on the credit and financial crises, and Money Morning Contributing Editor.
Gilani points out that inverse ETFs "track their underlying index for only one day at a time", and do not track intra-day or future moves.
Gilani further points out that inverse ETFs work in counter-intuitive ways. For example, he gives an example where a 2X leveraged reverse ETF goes from 100 to 90 one day, and then back up to 100 the next day.
You would probably assume that - by the end of the second day - your funds would be back where they started. In fact, Gilani explains, you would have lost money.
The drop from 100 to 90 the first day is a 10% drop. But the gain from 90 back to 100 on day 2 is an 11.1% gain, not a 10% gain.
Because of these dynamics, Gilani concludes that inverse and leveraged ETFs "are better suited to day traders than for long term buy and hold investors".
For a variety of reasons, Gilani doesn't like ETNs at all.