Blog Post

There seems to be a bit of a misconception out there about 2x and 3x ETF's. If you think that if the Nasdaq is down 25% in 2008 that QID is going to return 50%, you're wrong.

Its important to read the perspectus - I know no one reads it, but, you should.

In simple terms they attempt to provide 2x (or 3x in the case of Direxion) the daily return of the market it is tracking.

So if the Nasdaq is up 1%, QLD is up 2% and QID is down 2%. Pretty simple. Here is where the buy and hold will kill your portfolio.

Lets say that QID and QLD trades at $100 for the sake of an example.

On Monday, the Nasdaq closes down 5%.  Since QID returns 2x the daily inverse returns of the Nasdaq, it finishes the day up 10%, or $10 in our example. QLD finishes down $10.  So at the end of the day, we have QID at $110 and QLD at $90.

Tuesday is deja vu day as the Nasdaq closes down 5%.  QID moves up 10% or $11 to close the day at $121 and QLD finishes 10% lower at $81.

On Wednesday, the Nasdaq pops 10% on some good news.

In theory, the Nasdaq is about even to where it started on Monday.\

QLD moves up 20%, which means it moves up $16.10 ($81 + 20%) to close at $97.10.

QID on the other hand, drops 20% to move lower by $24.20 to finish at $96.80.

In both examples, you end up losing money, even though in theory, the Nasdaq should be even.

Imagine if you throw in the volitilty we enjoyed during the last few months.

So, whats the best way to trade these?

This is an investment vehicle best served by those who day or swing trade. Sideways markets can kill your portfolio.

I usually like to see which stock is near its high at 10am. I then place a a buy order if it hits the high of the day after that. On most days, you can come back at 3pm and see a profit.

I also have been scooping $200 - $500 in a few hours by picking up 500 -1000 shares and selling after the trend changes on the 15 minute chart.

The key here is, know what you are investing in, and adopt a trading plan that supports it.