I picked this up over at Investopedia. This is a great article about losing money using Leveraged ETFs (Exchange-Traded Funds). While there are some investment vehicles that make sense (such as index funds) there are some that simply don’t work out once you understand them. This is the case with leveraged funds. Rather than re-explain the math here, I suggest that you jump over to Investopedia to read it. Below are some hightlights:
Have you ever wondered how you can make sure that your portfolio loses money? For those of you who are tired of that extra cash weighing down your pockets and would rather just lose it aimlessly than give it to a worthy cause, I found the ideal investment: levered [sic-leveraged] exchange traded funds.
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Consider a hypothetical stock that is tracked by two double-levered [sic] ETFs, one bull, one bear. Since the debt portion of the instrument must consistently be rebalanced to ensure a proper debt-to-equity ratio, the funds track the daily performance of the stock rather than the overall annual percent change. Suppose this stock, with an initial value of $100 experiences a 25% price decline, followed by a 25% increase and then a 6.67% increase to bring its price back up to $100. A double-levered bull ETF would have a terminal value of $85 ($100*1.50*0.50*1.133) while the inverse fund would be worth only $65 ($100*0.50*1.50*0.87). This is, of course, before we factor in the management expense ratio. Essentially, despite the trend in the market, these instruments will lose value due to the daily volatility of the underlying asset.