WHY INVERSE ETF IS NOT AN INVESTMENTSomeone asked me about TZA, the Russell 2k inverse bear fund etf. These inverse bear ETFs DO NOT CONTAIN STOCK. They hold only futures contracts, which continually EXPIRE, like options. These funds are effectively like put option substitutes, they suffer severe, continuous time decay.
Please observe price since inception. That is not a typo. Adjusted for reverse splits over the years, price has declined from $1.5m to $36 per share last week.
People ask me, "How high can it go? If Russell sells off 10% more, will they go up 30%?" Well, maybe IF it it sells off 10% NEXT WEEK. IF NOT, then it might not increase at all, time decay is considerable and if market takes three months to sell off again, these shares will be more likely to trade in the $12-20 area, even if the market moves in their favor. Time decay is real, you cannot hold these more than a few days or at most weeks, even during the most bearish of markets.
A strong bear market rally like we had last week melts inverse ETFs and the price NEVER COMES BACK, they get to lower highs with each successive bear move. Pull the chart out to right to see recent etf price moves during covid and in corrections since. It never gets back to the previous highs.
Guaranteed to wipe out your Roth IRA and Education Trust funds, please don't bet the farm on these!
Instruments of financial suicide IMO. I have successfully traded them but rarely hold more than a week.
Bull 2x, 3x ETFs work the same way, in the other direction, they are long on futures contracts, and in a bull market like 2021, they just go up all year with a few minor setbacks, doubling and doubling. But when the Bear comes, the Bull funds crack in half or worse. TQQQ, the bull 3x shares, traded at $25 last week, down from $125 in January, gosh, -80%!!
This past few months has been most bearish since 2008 and the inverse funds did quite well, other than the March rally which cut them in half...
If you buy them here you're probably buying at a near-term market bottom, paying high premium price for these funds, and getting set up to hold the bag. Even if price does not change much over the summer, these ETFs will time decay and can easily go in half over three months!
I personally know of one contributor who invested a large sum in SQQQ during the bear move in September 2021, buying at or near the market bottom, he paid $45 for it in September 21. Asked me what to do? 'I lost so much, will it come back?!' Sadly, NO. Last week the price was $50 bucks again, yay, got his money back, right?! WRONG. Stock REVERSE split 1:5 last year when it traded under six bucks. So you got 1 share for every five you had, an 80% loss (AGAIN THAT 80% LOSS FIGURE). Hold it for a few more months to lose another 50%, be out 90%, etc etc. If you hold these long enough, you WILL lose 99% of your investment, guaranteed.
Attached link on UVXY Kudos to Hungry_Hippo, same most excellent advice!
Leveraged funds are tricky as Hell and will cut your account in half again and again if you do not time the market exactly! Good luck with that!
