XLF and SKF Both Negative Year to Date

Mar 25, 2009: 2:13 PM CST

You might ask “How can that be possible?”  The XLF Financial ETF is down roughly 30% year to date, but the SKF (as of March 24), which is the double inverse (short) leveraged Financial ETF… which you would think would also be up 60%… is also negative:  down 3%.

Let’s see the performance year-to-date up to Tuesday, March 24, 2009:

The SKF actually was negative 10% on March 23 year-to-date while the XLF was down 24%.

I’m on a campaign here to inform newer traders (and even experienced traders with little experience in inverse funds) to look very closely at double (and inverse) funds – particularly to avoid using them as long-term hedges and/or position trading vehicles.  Use them as short-term “supercharges” to day and week-long (at the most) swing trades.

Again, among other reasons (the way the fund is structured, etc), double funds suffer from the ‘drawdown’ phenomena, where, to get back to break-even after a loss, it takes a larger percentage to return to where you were.

Forget the leveraged component for a moment.

If you have a $100,000 account and manage to lose 50% of that account, then you’re down to $50,000.

Now, to get your account back to ‘break-even’ at $100,000, you can’t expect a 50% return to do it for you.  50% of $50,000 is $25,000.  If you lose 50%, you actually need a 100% return ($50,000 of $50,000) to get you back to where you started.

This is the problem facing leveraged funds tied to underlying indexes or sectors.  Percentage-wise, the funds track moves short-term, but dollar-wise, they don’t because of this “drawdown/percentage” function.

Look very carefully at the implications of this, and stick to using leveraged funds as day-trading or short-term swing trading vehicles only.  Refer back to my post yesterday “You Can’t Stay Wrong for Long in SKF” for additional information.

Corey Rosenbloom
Afraid to Trade.com

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3 Comments

3 Responses to “XLF and SKF Both Negative Year to Date”

  1. Charles Says:

    Hey Corey, this is a good series of posts…but the SKF is actually the inverse of the IYF. Don’t know if this aids or changes your analysis, but i thought i would pass it along.

    Good blog man, I like the tight focus.

    charleS

  2. Corey Rosenbloom Says:

    Charles,

    Excellent point – my goal with these two posts is to save newer traders from blowing out their accounts and not understanding why. I’ve seen so much attention on the SKF and my point is to shake people and say “hey wait – take a closer look at this and other leveraged funds. They’re not what you expect at times”

  3. Jack Says:

    How is this for long term arbitrage:

    Short FAZ and FAS at the same time. Yes, really.