After the price of a gold surges up to $1,000, two brothers — Sam and Sasha — sense an investment opportunity. Where will prices move next?
Sam, the optimist, looks for the upside. He invests $1,000 in a two-times leveraged bull ETF. This fund aims to double triple the daily return of a gold-mining index.
Assuming gold will drop, Sasha buys $1,000 in units of the related leveraged bear ETF. This fund seeksto deliver double the gains if the gold-mining index drops. Who is right?
The next day the gold moves up 10% to $1,100. The gold-mining index makes a similar jump. That means Sam bull ETF runs up to $1,200, while Sasha’s bear fund falls to $800.
Another day goes by and gold settles back to $1,000 — a 9.1 percent drop. So does the gold-mining index. To double that move, Sam’s bull fund sinks to $982. Sasha’s bear fund rises to $946.
The result: gold is the same price it was two days ago. So is the gold-mining index. Yet both brothers have lost money even before fees and transaction costs. (This example is for illustration purposes only. To learn more, consult a knowledgeable adviser.)