FAQ: Leveraged and inverse ETFs: What are the risks?
by Editorial Staff
Updated: March 28, 2015
All inverse funds and inverse ETFs suffer from beta slippage because they all track a certain market on a percent change basis. The greater the leverage and volatility, the greater the slippage. Bob Prechter explained this in his August 5, 2009, Elliott Wave Theorist:
We receive many emails from subscribers asking specific questions about investing. Some ask about trading in options or futures. In such cases, we cannot respond in good conscience with anything except "don't do it." If someone has to ask about trading leveraged vehicles, he is probably not qualified to do so. Another person asks, "Is it O.K. to invest in the ProFunds or Rydex short funds if that is my only short-side option?" Again, given the market-tracking mechanics of such funds, the only answer we can give in good conscience is "no." Buying such funds exposes the investor to the potentially dangerous problem of volatility slippage, whereby the market takes a particular herky-jerky path to lower prices that can drain money from an account every other time prices are re-set, which is typically once or twice a day. As a result of continual resets, such funds demonstrably fail to track the market long term.