Crazy ETF question

[noppenbd]

Ok, I am not really thinking of doing this, but I wanted to see hypothetically if this is just a crazy idea or what.

There are a bunch of double ETFs out there that aim to double the performance of an index. So for instance SSO aims to double the S&P500. My question is this, if you think long term that the S&P500 goes up 10% a year, wouldn't SSO be an even better long-term bet? So why wouldn't you turbocharge your IRA by replacing S&P500 with SSO?

I've got to admit I haven't a clue how SSO is able to perform this trick (although I sense options have a hand), but where is the hole in this crazy plan?

[jIM_Ohio]

Is the ETF double the yearly performance or double the daily performance?

The answer lies in the response to that question. I considered ULPIX (ultra bull) but 2X daily does not translate into 2X yearly.

[sweeps]

They do it with leverage. Instead of using $500 to buy $500 of stock, you borrow an additional $500 and buy $1,000 of stock. If the stock doubles, you earned 200% instead of 100% (minus interest).

Most people don't want to do this because they can't handle the volatility. If the stock market continues its overall upward trend, then yes, you would come out ahead.

Edited to add: To Jim's point, it's far from an exact science. Your actual return depends on when the ETF manager buys and sells, and when you buy and sell.

[Broken Arrow]

I've got to admit I haven't a clue how SSO is able to perform this trick (although I sense options have a hand), but where is the hole in this crazy plan?

I think you've answered your own question.

Like the Ultrashorts, SSO achieves this through complex derivatives, except going long. And the fact that we do not understand how this works is the risk in and of itself. At this point, it is only an assumption that such a fund will "work as advertised".

[jIM_Ohio]

I was looking forways to take more risk about this time in 2008. I considered using concentrated funds and leveraged funds, then decided to use sector funds instead.

When market goes up 10%, some sectors go up 11-15% and some only go up 1-9%. My goal is to have more assets going up at 11-15% than 1-9% with around 10-20% of the money we have invested.

We buy a little of each sector, then overweight with $100/month to a sector we want more of. Right now buying health care, tech (2 different funds), emerging markets, natural resources, growth, value, real estate and financial.
We overweight financial and real estate right now.
By end of 2009 I would expect to stop overweighting financial and move that money somewhere else (probably health care, but I have 12 months to decide my outlook for the market).

[noppenbd]

Is the ETF double the yearly performance or double the daily performance?

The answer lies in the response to that question. I considered ULPIX (ultra bull) but 2X daily does not translate into 2X yearly.

I think it's double daily. I guess that is a problem. Thanks for clarifying.

[kv968]

Leveraged funds like that shouldn't be held for the long term. The way the math works out with them, over time the only way you you would truly double your money is if the market (or whatever was being leveraged) went up (or down in the case of shorts) continuously. That's not going to happen over the long term or even short term.