How To Lose 40% In A Day

Want to learn how to lose 40% in a single trading day? Good. This post is for you.

Losing 40% or more in a day was always possible using futures and options, but before June 2006 it was nearly impossible to do so using an exchange-traded fund (ETF). What happened in June 2006? The first leveraged ETFs were introduced.

Fast forward to yesterday and we witnessed the largest one-day decline in history for an ETF: -48.3%. The 3x long Brazil ETF (BRZU) now holds this ignominious distinction.

 

How did this happen? Simple math. The unleveraged Brazilian ETF (EWZ) suffered a decline of over 16%, a nearly 7 standard deviation move (which as an aside is supposed to only occur once every 3,105,395,365 years). Multiply that by 3 and… voilà, you have your 48% decline.

 

When the first ETF (SPY) launched in January 1993, investors probably never envisioned what happened this week. At the time, the biggest fear was another 1987 crash, when the S&P 500 declined 20.5% in a single day (October 19, 1987). Since the launch of SPY in 1993, though, those fears have not come close to being realized. The worst one-day loss SPY has suffered is only 9.9% (on October 15, 2008).

Nowadays, thanks to leveraged ETFs, the 1987 crash has become child’s play. For a number of these ETFs, a 20% decline has become a non-event. The 3x long Gold Miners ETF (NUGT), for instance, has had 15 days in which it has declined 20% or more since its inception in late 2010. Its counterpart, the 3x short Gold Miners (DUST) bests this with 16 days with declines of at least 20%.

So you want to lose 40% in a single trading day? The following list is a good start…

 

Before this week, the 3x short Financials ETF (FAZ) had held the record for largest one-day loss, at 45.1% (on March 23, 2009). The record stood for over 8 years. But records, as they say, are made to be broken.

Who will be the first to lose 50% in a single day? The casino is open – place your bets.

Disclaimer: At Pension Partners, we use Bonds as our defensive position in our absolute return strategies for all of the above reasons. Bonds have provided a more ...

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