I’ve been working on a Webinar for #ContangoETFs and with the discussion below on $DUST, wanted to pass along part of what I’m preparing. When you have a levered ETF, they are designed to track the DAILY move of the underlying, multiplied by 2 or 3. So if $GDX is up 1% on the day, $NUGT will be up 3% and $DUST down 3%. But then it resets next day. This creates a compound tracking error that will NOT track the underlying beyond a one-day period. In fact, it will drag both the positive & negative levered ETFs down. Here’s an example:

Let’s say the underlying and long and short 2x ETFs all start at $100. We then watch price action as the underlying swings back and forth 10%:

Day 1: underlying up 10% = 110.00
Long 2x up 20% = 120.00
Short 2x down 20% = 80.00

Day 2: underlying down 10% = 99.00
Long 2x down 20% = 96.00
Short 2x up 20% = 96.00

Day 3: underlying up 10% = 108.90
Long 2x up 20% = 115.20
Short 2x down 20% = 76.80

Day 4: underlying down 10% = 98.01
Long 2x down 20% = 92.16
Short 2x up 20% = 92.16

As you can see, with equal up and down days repeated, the underlying moves down slowly but the 2x ETFs go more quickly. Repeat this way for 6 months and both ETFs would be worth only $2.54.

So GDX has been bearish since its 2011 highs… NUGT has absolutely collapsed as a result of this compounding, but DUST has stayed relatively flat for the same reason.

Interesting, huh? That’s why these “ContangoETFs” all work… even if you don’t have the actual “contango” from futures roll, you get this compounding tracking error dragging them all down.

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