ChrisKacher & Gil Morales

Chris Kacher and Gil Morales are managing directors of MoKa Investors LLC and co-founders of Virtue of Selfish Investing. Both were senior portfolio managers at William O’Neil + Co. They co-authored the book Trade Like an O’Neil Disciple: How We Made 18,000% in the Stock Market. Kacher received his B.S. in chemistry and Ph.D. in nuclear physics from the University of California at Berkeley, where he studied under Nobel laureate Glenn Seaborg and helped to discover Element 110 on the Period Table of Elements and to confirm Element 106.

Chris & Gil’s Latest Posts

On Friday, Howard Gold argued in a column on MarketWatch that leveraged ETFs are the worst investment ever. We disagree.

The column argued that daily rebalancing costs long-term investors.

Rebalancing / decay actually works to your advantage in trending markets. For example, if you look at the NASDAQ 100 NDX, -0.49%  vs. its 3-times ProShares UltraPro QQQ ETF TQQQ, -1.29% from the low of 8/27/10 to the high of 11/9/10, the NASDAQ 100 was up 25.9% while the TQQQ was up 97.3%, or nearly 4x the NASDAQ 100! Thus TQQQ more than outperformed 3-times the NASDAQ 100. Investors who bought and held 100 shares of 3-times ETF TQQQ through this period made more than they would have had they bought 300 shares of the 1-times equivalent PowerShares QQQ Trust QQQ, -0.43%

That said, rebalancing / decay works to your disadvantage in volatile markets that go nowhere. Shorting a normal leveraged ETF instead of buying an inverse leveraged ETF removes the rebalancing issue / decay factor.

Since our Market Direction Model at Selfish Investing switches signals on average between 12 to 20 times a year and usually exits after the uptrend or downtrend reverses, rebalancing / decay should have only a small impact if any. The results speak for themselves.

That said, some may wish to take the decay advantage/disadvantage out of the equation by shorting normal leveraged (2-times and 3-times) ETFs on a sell signal instead of buying inverse ETFs provided you can get the borrow. Be careful of high fees associated with shorting ETFs. In our experience, there are enough ETFs out there that can be borrowed with little to no fees as fees are typically calculated on an annualized percentage basis then pro-rated according to the length of time one holds the ETF. So an ETF with a 5% fee would be 5% of the cost of the ETF over a whole year, which would then be pro-rated since the ETF would typically be held for a few weeks or less which would work out to nearly a negligible amount.