NUGT is not for long-term holding

I got a comment from my friend (Frank) after I posted my thoughts on the gold trading via NUGT: 

 中线来说，我也是看好黄金及其相关资产的，可能短线会有震荡调整，这些观点是一致的，最近也在帖子中几次提及。但 NUGT 这种三倍做多的 leveraged ETF, 由于 tracking error and leveraged ETF 所引起的 value decay，作为中长线投资还是有其风险的，可能比较适宜于短线趋势很强时，这跟 buy put 有某些方面的类似，其风险的控制有很大的不确定性。

On NUGT 5-year chart, 其 reverse split adjusted price 在 Sep 9, 2011 最高 over $20,000，跌至今年1月初的最低 $17.4，不到5年左右前最高点的 0.1%；而其反向的3倍做空 ETF DUST，从 Jun 26, 2013年的 reverse split adjusted 最高 $830左右，跌至最近最低 $12.10，不到3年左右前最高点的 1.5%。可见，中长线来说（尤其经过一次牛熊转换后），tracking error and leveraged ETF 所引起的 value decay 将使绝大多数 leveraged ETF 损失惨重。

 

First of all, I totally agree with Frank that NUGT is not suitable for long-term investment as a general rule. As a matter of fact, any leveraged ETFs are not good ones for long-term holding given the nature they are set up with. They use futures to track the underlying assets and as such, they have to keep rolling over their positions by selling low but buying high, which will therefore keep reducing their values over time. That’s why if you check the initial value of NUGT, eg. it was over $20,000 per unit as  compared with less than $100 as I’m writing. So let me be clear, please don’t simply buy and hold NUGT if you are thinking to go long with gold stocks for years. You may end up with being right on the trend but still losing money.

 

Having said that, I do think NUGT could be a good trading vehicle. This is especially true when NUGT is traded along with an uptrend. When the trend for gold stocks are moving up, NUGT will go up faster due to its leverage nature. Of course, it will equally lose value very fast if the trend turns around. So the best to trade NUGT is to use options to hedge it: when it is overbought, writing covered calls and when it is oversold, selling naked puts. This should be a great technical trading strategy for such a leveraged ETF during the bull run of gold stocks that is ongoing!