quote:
Nope, not a troll, just a terrible investor it seems.
The $3.44 is my cost basis, so yes if I sold today I would take a loss. As for the decay and all that stuff, how does that really affect me? I have 75 shares at $3.44. If I hold on for a year or so until it goes up to $40, how will I not make profit?
Apologies for assuming it was a troll. I'm a little cynical at times. Too much time on the GB as it were.
I'll try to answer this as best I can. The decay affects you because it takes a toll on the ETF's trade price. A leveraged ETF is a publicly available fund that is indexed to something, in your case oil futures. The ETF's money managers buy and sell oil futures contracts with money invested in the ETF as the price of oil goes up and down in order to get the ETF to perform at some multiple of the underlying commodity (your multiple is 3X). In a perfect world, if oil went up 5%, UWTI would go up 15%, and vice versa. That's the compounding part. The decay part comes into play because there is a transaction cost and fees associated every one of those oil futures contracts that the ETF's money managers buy and sell, which takes a bite out of the profits. So as a result of this compounding and decay, the value of all leveraged ETFs naturally trend towards zero.
Here's an example of negative compounding with leveraged ETFs:
Day 1: You buy UWTI at $10 when oil is at $50. Oil then drops to $45 (10% loss). UWTI goes to $7 in a perfect world (30% loss, since it's 3X leveraged).
Day 2: Oil goes back up to $50 (11.1% gain). UWTI goes up to $9.33 in a perfect world (33.3% gain, again since it's 3X leveraged).
In this example, you'll see how the leveraged ETF loses money, even though the underlying commodity price ultimately breaks even. This is why they're extremely bad long-term investment vehicles.
I hope some of this makes sense to you. I'm sure there are Ags on here that can explain it much more concisely and simpler than I can.
