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Comment by second--shift | Hacker News Reader

The contango drag on 3x ETFs is hilarious - good luck on your endeavors sir, I've got futures contracts for sale for your fund manager to buy.

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no it's not. it is actually positive due to the dividends . a 3x funds pays 3x the dividends . the borrow cost is only 1%, versus 2% dividend

> a 3x funds pays 3x the dividends

what? which funds pay 3x dividends? All of the leveraged ETFs i'm familiar with replicate the 3x exposure with futures contracts, which do not pay dividends. the drag exists when these futures contracts are in contango, where the back-month is more expensive than the front-month. The leveraged ETF pays that drag every time the fund rolls to the next futures. Nothing to do with borrowing costs.

This is also the reason why USO trends down long term, regardless of the spot price of oil.

it would only be in contago if there is borrow and storage cost. This applies to commodities. But stocks pay dividends, so this can cease backwardation if interest rates are low relative to dividends.

But where are the 3x funds that pay 3x the dividends?

futures and swaps do not pay dividends, so the dividends on 3x funds are imputed in the nav, adjusted incrementally everyday . I compared a 3x of the DIA (UDOW) to the 1x version and found that the 3x outperform in such a way that the only reason for the discrepancy is 3x dividends.

Ok.

Leveraged ETFs are very dangerous animals, though.

UDOW lost 17% in 2020 while DIA went up 8%.

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