The last five years have certainly been a rocky one for
investors in pretty much every corner of the market. In the time
period, the S&P 500 was more or less flat although it
experienced two incredible stretches in which it first lost
roughly half of its value in one, and then proceeded to double
over the next few years to recoup nearly all of its losses.
These shifting trends-which put the S&P 500 back within
striking distance of its all-time (non-inflation adjusted)
high-have also obviously led to a very high level of volatility
for the benchmark index. In fact, according to
data from XTF.com
, the standard deviation for
over the past five years was 26.4%, a level that is roughly 75%
higher than what investors have seen in the same index over the
last few months, underscoring just how uncertain markets have
been over the past half decade.
Unsurprisingly, the volatility levels go up even more when
investors take a closer look at some of the leveraged and inverse
funds on the market. For example, two of the oldest leveraged and
tracking the broad market out there-
-both have five year standard deviation levels over 50% (see
the Guide to the 10 Most Popular Leveraged
This shouldn't be too surprising to investors, as SSO and SDS
track the return of the S&P 500 using, respectively, 2x and
-2x leverage, albeit on a daily basis. Given this, one should
probably expect these two funds to have roughly double the
standard deviation that their underlying index exhibited over the
same time period.
Yet beyond these two, investors have also seen incredible
standard deviation levels in a number of other leveraged and
inverse ETFs in the time period in question. While leveraged and
inverse financial ETFs, basic materials, and oil ETFs all saw
extremely volatile five year periods, they all paled in
comparison to one segment of the economy in this respect, real
Is ROOF a Better Real Estate ETF?
The -2x and 2x real estate ETFs, the
ProShares Ultra Short Real Estate Fund (
ProShares Ultra Real Estate Fund (
, both experienced truly tremendous five year periods from a
volatility perspective, with readings above 90% for both funds.
While the leverage was certainly a necessary component to bring
about such extreme standard deviation levels for these relatively
old funds, the general trend of the real estate market was also a
key contributor to the volatility as well.
After both URE and SRS' debut in early 2007, the broad real
estate market reached a historic high, spurred by a variety of
factors. Soon after that, as we all now know, real estate
cratered in a catastrophic fashion leaving the sector decimated
Three Best Performing Small Cap Growth ETFs
This was especially true for URE and SRS as these two ETFs are
dominated by REITs in the American market. Furthermore, mid caps
and small caps take up a big chunk of assets-nearly 50% at this
point-so higher volatility levels should be expected anyway.
This slump was followed by a long and steady rise back to
nearly breakeven-granted with a few modest drops along the way.
The performance was actually enough to move the
iShares Dow Jones US Real Estate ETF (
-a product that tracks the same index as URE and SRS-to a
performance of -8.7% for the trailing five year period (see
Leveraged and Inverse ETFs: Suitable Only For
Short Term Trading
However, when leveraged ETFs are seeing high levels of
volatility, along with deep trends, the impact on long term
performance is usually devastating. That has certainly been the
case for the leveraged real estate ETFs as both are down more
than 60% for the time frame in question, with SRS losing more
than 98% of its value in the past half decade.
The Bottom Line
While leveraged ETFs can certainly work in your favor during
short-term periods, long term performance is usually terrible for
these products. This can be especially the case during periods in
which deep trends form and a great deal of gains evaporate (see
Understanding Leveraged ETFs
URE has actually been a pretty solid performer over the
trailing three year period-up 142%-- but it hasn't been able to
shake the turmoil of the 2008-2009 crisis. Meanwhile, SRS was up
roughly 119% at one point in the trailing five year period, but
the long term recovery of the housing sector helped to erase
these gains over the long haul, making the ETF actually the
underperformer of the two.
So while leveraged and inverse ETFs can certainly help
portfolio returns when you pick the correct side, there are also
significant long-term risks to these potent instruments as well.
As we have seen in the real estate ETF example above, the
combination of performance trends and long term volatility can be
extremely devastating for investors, once more demonstrating that
leveraged funds need to be monitored closely and only utilized
for short time periods.
Want the latest recommendations from Zacks Investment
Research? Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
ISHARS-DJ REAL (IYR): ETF Research Reports
PRO-ULSH S&P500 (SDS): ETF Research
PRO-ULS RE (SRS): ETF Research Reports
PRO-ULTR S&P500 (SSO): ETF Research
PRO-ULT RE (URE): ETF Research Reports
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for
the Next 30 Days. Click to get this free report