If you ever watch BNN you’re bound to see Howard Atkinson promoting Horizons BetaPro ETFs which allow you to “profit or protect” in an up or down market. Their lineup of ETFs are more than just index tracking exchange traded funds – they also return 200% of the daily performance of the indices in question. Not only that, they offer a Bull and Bear version of each “double exposure” ETF. The Bull version gives you 200% of the daily performance of the underlying index while the Bear version gives you 200% of the INVERSE daily performance. (Horizons BetaPro are not the only company offering double and double inverse exposure ETFs.)
What does this mean? Let’s say your index goes up 1% today. The Bull version of the ETF should be up 2%. The Bear version should be DOWN 2%.
If the underlying index is down 2%, then the Bull version is down 4% and the Bear version is UP 4%.
There is a reason they always stress 200% of the DAILY performance. You cannot just take the 1 year, 3 year, 5 year, 10 year performance numbers of the underlying index and multiply by 2 (or negative 2 for the bear versions) to figure out what your returns should be. This is because the built-in levering resets every day. It is best explained with an example.
Let’s say we have an underlying index with a value of 100 and we have two investors. We have Investor A who is bullish and owns the Bull version of the ETF and we have Investor B who is bearish and owns the Bear version of the ETF. Assume for our little experiment that we are only going to look at two days of trading. On Day 1 the index is up 25 points to 125. On Day 2, the index is down 25 points bringing us right back to 100. If you owned a plain vanilla ETF that didn’t have 200% exposure and just tracked the index you would be break-even at the end of day 2. (I’m ignoring MERs for this exercise.)
Investor A on the other hand would experience the following: Since the index was up 25% on Day 1, his ETF is up 50% for a unit value of 150. Now on Day 2, when the index loses 25 points that is -20% of 125. 200% of -20% is -40%. His ETF which started the day at 150 is down 40%, which translates to a final value of 90. So the underlying index is breakeven, and the double exposure bull ETF investor is down 10%.
What about Investor B? On Day 1 when the underlying index was up 25%, that meant the Double Bear ETF was down 50% for an ETF value of 50. On Day 2 when the underlying index went from 125 to 100 for a loss of 20%, that means the double bear ETF is UP 40%. A 40% gain on a value of 50 yields a final value of 70. So in this case the underlying index is flat over two days, but the double bear ETF investor is down 30% in total.
Of course, these are extreme examples, but you get the point.
Just for fun I put together a quick spreadsheet which shows an underlying index going up by 1% per day for 41 days, going down 1% per day for the next 31 days, and then gaining 1% per day for the next 27 days. The underlying index had grown from 100.00 to 145.5 (gain of 45.5%). The double bull ETF would’ve ended up at 209.6 (gain of 109.6%). The double bear ETF would’ve ended up at 45.8 (loss of 54.2%).
For disclosure’s sake – I actively use Double Bull ETFs in some of my clients’ portfolios (equities and fixed income).
If you like this blog, you might like my book:
RRSPs: The Definitive Book on Registered Retirement Savings Plans