No matter how much I warn about the pitfalls in the market, including leveraged ETFs, many chose to ignore me, and eventually learn on their own the hard way, writes Avi Gilburt, technical analyst and author of ElliottWaveTrader.net.
As many of you know, I run a trading room with well over 3500 members, including over 450 money managers. I have seen the good, the bad, and the ugly as far as what traders and investors do through the years.
To this end, today I’m focused mostly on the evils of leveraged ETFs and those who advise their use as buy and hold vehicles.
You see, most people do not understand how these leveraged ETFs work. And, yes, that even includes analysts. The ETFs are designed in such a way that if you are not catching a strong trending move perfectly, they will lose money. Even if the market is moving sideways, these leveraged ETFs lose money. And, if the market moves down, well, they lose money twice or three times as fast.
So, unless you are able to time the market absolutely perfectly, then you should never, ever, ever buy and hold one of these instruments. They are designed to be a trading vehicle and nothing more.
Yet, so many believe these instruments are the ticket to overnight wealth. In fact, I have seen unscrupulous analysts and promoters promise the path to riches for those who take their suggestion of buying and holding these leveraged funds. I promise you that they are not the path to riches for most people. Rather, they are the ticket to the overnight poor-house.
Real-life examples: TQQQ
Let me give you an example. There was a call by an analyst I saw in 2016 which suggested to buy and hod a metals 3X ETF when it was around 25, without any stops, and using much more than 25% of your portfolio. In fact, this analyst did exactly what most amateurs do – they buy at just about the high of the market in an oversized position because they have been sucked in by the market sentiment. In other words, he was simply part of the herd being led to slaughter. And, he backed up his call by promising those who take his suggestion will be wealthy beyond their wildest imagination.
Sadly, for those investing their hard-earned money based upon that call, that 3X ETF hit a low of 3.77 only a few months later. For those counting, that is an 85% drop in price in a few months, and it was catastrophic to those who followed the call. Moreover, based upon the way these 3X ETFs are calculated, the underlying market will have to rally significantly higher than the point at which this investment was made in order for those who bought into this suggestion to even break even.
Clearly, this analyst has not learned from his massive failures, as he has recently done it again to his subscribers. This time, he supposedly suggested a buy and hold on the ProShares UltraPro QQQ ETF (TQQQ) just as the market was hitting its highs. And, again, he promised riches beyond their wildest imagination to those foolish enough to follow him. Unfortunately, these investors are now experiencing a whole lot of pain at this time.
Get Trading Insights, MoneyShow’s free trading newsletter »
While I am expecting the market to hit further all-time highs, those that bought into the TQQQ at the previous highs will likely have to see the market go 10% or more higher than where they initially bought it just to break even. Again, this is a trading instrument, and not a buy-and-hold instrument, specifically due to the significant decay built into these products.
These suggestions by this analyst broke every principle I have learned as an investor.
First, one should never buy a 3X ETF as an investment, as it is a trading vehicle and not a buy-and-hold vehicle. Any knowledgeable advisor or market analyst should know this, and if you see an advisor suggesting otherwise, please recognize that he is suggesting that you gamble with your money.
Second, these market calls did not advise stops, since the belief was that the market would correct any bad timing entries, and that the “manipulators” would take your stops. Well, I think we can all see why not using stops was catastrophic to those following these market call.
Third, the advice of investing as much as 50% or more of one’s portfolio into any one vehicle or sector is also another form of gambling. And, to suggest that large of a position using a 3X ETF without stops is even worse than gambling…it is reckless gambling. You may as well just flush your money down the toilet.
So, after seeing another massive failure of inappropriately utilizing a 3X ETF, I felt it was a good time to warn people again. Remember: Bulls get fat; bears get fat, but pigs get slaughtered. Just ask those who got slaughtered following this analyst’s 3X ETF suggestion back in 2016, as well as the latest one at the recent equity market highs.
Each and every one of you have a responsibility to yourself, your future, and your family’s future and should not be taking needless risks in an already difficult financial environment. If you follow some simple risk management strategies and stay away from 3X ETFs for investment purposes, you give yourself a much better chance of finishing this marathon by avoiding any catastrophic setbacks from which it could take years to recover.
At the end of the day, I would even welcome regulators prohibiting anyone to hold a 3X ETF for more than a week. It would at least offer some indirect protection from unscrupulous and reckless advisors.
Subscribe to Elliott Wave Trader here
https://www.elliottwavetrader.net/
