i’ve been doing some work on powershare ultra’s. i think that’s what they’re called. basically double leverage (somewhat in theory) to a bunch of indices. one of the best known ones is SSO which is double leverage a broad index (S&P 500??) or DIG (double leverage DJ oil and gas index, which is heavily weighted towards exxon) i have a bunch of questions, but here’s my key one… i ran regressions on these on bloomberg vs. their underlying indices and the real leverage looks more like 3.5X or higher. why is this? are they not arbitragable by specialists? i vaguely remember this from CFA? Here are the rest of my questions are they meant to replicate double the total return or capital appreciation return (i.e. dividends)? are they leveraged portfolios of the underlying stocks? or are they done with futures? i realize they are always rebalanced to twice the leverage? but does that get difficult after they’ve moved alot? do they pay a finance charge? does that impede the double return?? do i need to worry about sponsor risk? here in canada, the top products are basically run by a subsidiary of a very small company… powershares i believe are invesco (out of denver??) i also realize there’s some strange action on the double leverage. the fund borrows and buys low, and sells and pays off debt at high levels to maintain the double leverage. actually just on daily up/down moves. basically, i like the idea of the instruments… WONDERING WHY THE OBSERVABLE LEVERAGE IS NOWHERE CLOSE TO 2X. THANKS IN ADVANCE!!

do a search on this one for some general info… we have discussed this before, but you bring up some interesting questions.

These “Leveraged” ETFs use derivatives to try to match double the daily percent change in an index or sector. Theoretically, SSO should have double the percent change of the S&P500 each day. A couple examples: Day 1: S&P up 2% SSO up 4% Day 2: S&P down 2% SSO down 4% Day 3: S&P up 2% SSO up 4% Day 4: S&P down 2% SSO down 4% Cumulative return for S&P (1.02)^2*(.98)^2=> -.08% Cumulative return for SSO (1.04)^2*(.96)^2=> -.3% In this example the returns differ by 3.75x.

thanks guys… i will search… and you cleared up some of the math. i was too fixated on the mechanisms with the debt or futures, vs. just plugging some prices into excel so i’ve done some simple examples if you assume 20% market returns for two months in a row (assume it’s rebalanced monthly). then the market will do 44%… this vehicle will do 96% minus 20% two months in a row… market does minus 36%. this vehicle does minus 64% hope those numbers are right… and there are so many permeations in between, i don’t understand all the math.

It doesn’t only depend on what the market does in the next two months but HOW it does it. In my previous example, you can see that if the S&P changed by -0.08% in one day, SSO would be down -0.16%. But since it went up and down before it got to the -0.08%, SSO ended up at -0.3%.

thanks… i’ve come to realize the pattern matters alot. i played around alot with lots of small gains and one big loss and vice-versa… i realized it’s not monthly, i just wanted to work with bigger returns to make it easier to interpret the results. is there a reasonable scenario you can come up with where the market is up alot in 3 months and the powershares are down. i presume if i change my regression to daily, the regression coefficient will move alot closer to 2… i was using weekly.

For the most part they will utilize swaps to get the desired exposure. Depending upon the indice, they may use stock baskets for 60-85%, then use Swaps for the remainder of 115-140% of the exposure. Futures can be used, depending on the index, but they do not track as well as swaps. An in ETF land, people are pissed if the ETF isnt tracking the index appropriately. I think you are thinking about PROSHARES Ultra and Ultrashort ETFs.

If these things are geared for twice the return (ignoring the patern of return), why wouldn’t everyone own these things, especially now when the S&P is at such a low and the *general* thought is that the S&P is close to a bottom? I’ve got to be missing something, or these shares are just too new (looks like 6/21/06) was the inception date per bbrg GP function

Heck with Powershares Ultras. If you believe that, try call options on S&P futures…

Rydex and Profunds have been running these leveraged and inverse mutual funds for 10+ years. They have been running the leveraged and inverse ETFs for the last couple of years. With these you cannot ignore the pattern of return, because they are twice the return on a daily basis. That makes a huge difference, especially if the market is extremely volatile.