ETF question

[dg]

Suppose you buy an ultra index based etf, and during your ownership of it the index loses more than half of its value -- causing the etf to fall through zero. Does your etf holding cease to exist when zero is reached; or does it continue with the requirement that you must make up the difference to your broker until such time as the etf returns to positive ground?

[bankedout]

Each one is different. Read the prospectus for the particular ETF you are interested in. They usually go through multiple scenarios in the prospectus and discuss the outcomes.

I have never come across one that allows a negative value.

[ira85]

I think the key issue is that the leveraged ETF's double or triple daily movement, not cumulative movement over time. So they have a very high correlation with the index on a daily closing basis, but their performance can vary significantly from the 2x goal over time.

Example, consider XLF the unleveraged financial ETF. In the past year it went from $24.11 to $8.19, a loss of $15.92 or 66%. The 2x leveraged financial ETF, went from $27.81 to 2.36, a loss of $25.45 or 91.5%. Each day the leveraged fund losses double the unleveraged. But since each day's loss is no more than a few percent, it can't go to zero. I don't know what would happen if the if the index gapped lower on the open more than 50%. I think that's one scenario that would be difficult for the leveraged ETF to deal with. But ordinary daily moves can be managed without risk of going to zero.

[dg]

My guess is that they must reset in proportion to their referenced index value each open. That is all I can think of to explain it. And if that is the case, the same mechanism keeps them from growing astronomically in a strong bull market. The bottom line is that ultra etfs are basically for day traders. Long term they would tend to blend with their relative index portion if given constant trend.

[sd]

Here's a good video link sent to me from Leavitt brothers.com that illustrates the 3x leveraged FAS ETF as not being good for a longer term period.
They select 3 different time frames, and show the suprising results. This likely applies to a lesser extent to the 2x leveraged "Ultra" funds if they use the similar mechanism for daily rebalancing.

The lesson here, is to compare the ultra fund and the underlying over a period of time and movement and to see how each have historically performed.
This link is off my e-mail, hope it works:
by111w.bay111.mail.live.com/mail/InboxLight.aspx?n=151601961 If not, more information may be found at Leavitt brothers.com and one can sign up for their weekly e-mails and trading methods. SD

[blyghme]

My understanding is that ETFs like - all closed ends - can sell at a premium or a discount to the underlying asset value. Like all shareholders - owners have limited liability - if you own company where the liabilities exceed the assets - you are not liable to the creditors personally even though the company has negative value.
Blygh