Demonstration of Inherent Decay In Leveraged ETFs

Starting Account: $100.00 Variable: Initial Starting Capital

Daily % Change: 10% Variable: Daily % change in price - a sequence of alternating gains and losses

Leverage Leverage The purpose of this page is to demonstrate the acceleration of decay
Day 1 2 3 Day 1 2 3 associated with leveraged ETFs. The underlying principle is easy to
0 $100.00 $100.00 $100.00 0 $100.00 $100.00 $100.00 understand - if you loose 20% of your trading capital, it takes a 25% gain to
1 $110.00 $120.00 $130.00 25 $97.50 $73.53 $41.92 break even, and with 3x leverage, that 20% loss is now 60%, and it will take
2 $99.00 $96.00 $91.00 50 $77.78 $36.04 $9.46 150% to break even. Even without the effects of leverage, a choppy market -
in this example a series of equal alternating gains & losses - will lead to a loss
3 $108.90 $115.20 $118.30 100 $60.50 $12.99 $0.90
of principle. In the initial example, after only 25 days of chop our 3x leveraged
4 $98.01 $92.16 $82.81 150 $47.06 $4.68 $0.08 account is down by over 58%, yet the unleveraged account is only down
5 $107.81 $110.59 $107.65 200 $36.60 $1.69 $0.01 2.5%. After 100 days, our unleveraged account is now down almost 40% yet
6 $97.03 $88.47 $75.36 our leveraged account is down over 99%!
7 $106.73 $106.17 $97.96
8 $96.06 $84.93 $68.57
9 $105.67 $101.92 $89.15
10 $95.10 $81.54 $62.40 Leveraged vs. Unleveraged Decay
11 $104.61 $97.84 $81.12
12 $94.15 $78.28 $56.79 $130.00
13 $103.56 $93.93 $73.82
14 $93.21 $75.14 $51.68 $120.00
15 $102.53 $90.17 $67.18
16 $92.27 $72.14 $47.03
$110.00
17 $101.50 $86.57 $61.13
18 $91.35 $69.25 $42.79
$100.00
19 $100.49 $83.10 $55.63
$90.00
20 $90.44 $66.48 $38.94
21 $99.48 $79.78 $50.62 $80.00
22 $89.53 $63.82 $35.44
23 $98.49 $76.59 $46.07 $70.00 Column C
24 $88.64 $61.27 $32.25
25 $97.50 $73.53 $41.92
Column D
$60.00
26 $87.75 $58.82 $29.35 Column E
27 $96.53 $70.58 $38.15 $50.00
28 $86.87 $56.47 $26.70
29 $95.56 $67.76 $34.72 $40.00
30 $86.01 $54.21 $24.30
31 $94.61 $65.05 $31.59 $30.00
32 $85.15 $52.04 $22.11
33 $93.66 $62.45 $28.75 $20.00
34 $84.29 $49.96 $20.12
35 $92.72 $59.95 $26.16 $10.00
36 $83.45 $47.96 $18.31
37 $91.80 $57.55 $23.81 $-
38 $82.62 $46.04 $16.66 0 3 6 9 13 18 23 28 33 38 43 48 53 58 63 68 73 78 83 88 93 98
39 $90.88 $55.25 $21.66
40 $81.79 $44.20 $15.16
Trading Days
41 $89.97 $53.04 $19.71
42 $80.97 $42.43 $13.80
43 $89.07 $50.92 $17.94
44 $80.16 $40.73 $12.56
45 $88.18 $48.88 $16.33
46 $79.36 $39.11 $11.43
47 $87.30 $46.93 $14.86
48 $78.57 $37.54 $10.40
49 $86.42 $45.05 $13.52
50 $77.78 $36.04 $9.46
51 $85.56 $43.25 $12.30
52 $77.00 $34.60 $8.61
53 $84.70 $41.52 $11.19
54 $76.23 $33.21 $7.84
55 $83.86 $39.86 $10.19
56 $75.47 $31.89 $7.13
57 $83.02 $38.26 $9.27
58 $74.72 $30.61 $6.49
59 $82.19 $36.73 $8.44
60 $73.97 $29.39 $5.91
61 $81.37 $35.26 $7.68
62 $73.23 $28.21 $5.37
63 $80.55 $33.85 $6.99
64 $72.50 $27.08 $4.89
65 $79.75 $32.50 $6.36
66 $71.77 $26.00 $4.45
67 $78.95 $31.20 $5.79
68 $71.06 $24.96 $4.05
69 $78.16 $29.95 $5.26
70 $70.34 $23.96 $3.69
71 $77.38 $28.75 $4.79
72 $69.64 $23.00 $3.35
73 $76.61 $27.60 $4.36
74 $68.94 $22.08 $3.05
75 $75.84 $26.50 $3.97
76 $68.26 $21.20 $2.78
77 $75.08 $25.44 $3.61
78 $67.57 $20.35 $2.53
79 $74.33 $24.42 $3.29
80 $66.90 $19.54 $2.30
81 $73.59 $23.44 $2.99
82 $66.23 $18.76 $2.09
83 $72.85 $22.51 $2.72
84 $65.57 $18.00 $1.90
85 $72.12 $21.61 $2.48
86 $64.91 $17.28 $1.73
87 $71.40 $20.74 $2.25
88 $64.26 $16.59 $1.58
89 $70.69 $19.91 $2.05
90 $63.62 $15.93 $1.44
91 $69.98 $19.12 $1.87
92 $62.98 $15.29 $1.31
93 $69.28 $18.35 $1.70
94 $62.35 $14.68 $1.19
95 $68.59 $17.62 $1.54
96 $61.73 $14.09 $1.08
97 $67.90 $16.91 $1.41
98 $61.11 $13.53 $0.98
99 $67.22 $16.24 $1.28
100 $60.50 $12.99 $0.90
 Estimated Maximum/Minimum Values of $FAZ & $FAZ at Various $SPX Levels
Based On Relative Performance of Finnies to Broader $SPX Market

Current Value of $SPX: 940.00 Variable: Today's closing value of the $SPX
Current Value of $FAZ: 4.47 Variable: Today's closing value of $FAZ
Current Value of $FAS: 10.29 Variable: Today's closing value of $FAS
Lower Limit of $SPX: 600.00 Variable: Lower limit of $SPX for which you wish to estimate $FAZ $FAS potential values
Upper Limit of $SPX: 1100.00 Variable: Upper limit of $SPX for which you wish to estimate $FAZ $FAS potential values
Days to Reach $SPX Level: 10 Variable: Rate of market decline/accent - How many days does market take to reach each $SPX level
Leverage: 3 Variable: Leverage of the ETF/Inverse ETF - included to generalize spreadsheet for all leveraged ETFs

Relative Performance of Underlying Index of FAZ/FAS to Broader $SPX Market

SPX 0.5 1.0 1.5 2.0 2.5 3.0
FAZ FAS FAZ FAS FAZ FAS FAZ FAS FAZ FAS FAZ FAS
600.00 7.08 6.36 10.98 3.83 16.73 2.25 25.06 1.28 36.94 0.70 53.68 0.37
625.00 6.87 6.56 10.39 4.10 15.44 2.50 22.60 1.49 32.63 0.86 46.50 0.48
650.00 6.67 6.78 9.81 4.39 14.21 2.78 20.33 1.73 28.71 1.05 40.09 0.62
675.00 6.47 7.01 9.25 4.70 13.06 3.10 18.22 2.00 25.16 1.27 34.38 0.79
700.00 6.27 7.24 8.71 5.03 11.97 3.45 16.28 2.33 21.95 1.55 29.33 1.01
725.00 6.08 7.49 8.19 5.40 10.94 3.85 14.50 2.71 19.06 1.89 24.88 1.29
750.00 5.88 7.76 7.69 5.80 9.98 4.30 12.86 3.16 16.48 2.29 20.98 1.65
775.00 5.69 8.03 7.21 6.23 9.07 4.80 11.37 3.68 14.17 2.79 17.58 2.11
800.00 5.50 8.32 6.74 6.70 8.23 5.37 10.00 4.28 12.12 3.40 14.62 2.68
825.00 5.31 8.63 6.29 7.22 7.44 6.02 8.76 5.00 10.30 4.14 12.07 3.41
850.00 5.13 8.96 5.87 7.78 6.70 6.75 7.64 5.84 8.70 5.04 9.89 4.34
875.00 4.94 9.30 5.46 8.40 6.02 7.57 6.63 6.82 7.30 6.14 8.03 5.52
900.00 4.76 9.66 5.06 9.07 5.38 8.51 5.73 7.98 6.08 7.49 6.46 7.02
925.00 4.58 10.05 4.69 9.81 4.80 9.58 4.91 9.35 5.03 9.13 5.15 8.91
950.00 4.40 10.45 4.33 10.62 4.26 10.79 4.19 10.96 4.13 11.14 4.06 11.31
975.00 4.23 10.87 4.00 11.48 3.79 12.12 3.58 12.79 3.38 13.49 3.20 14.23
1000.00 4.07 11.29 3.70 12.37 3.37 13.55 3.06 14.83 2.78 16.22 2.52 17.72
1025.00 3.92 11.71 3.43 13.31 3.00 15.10 2.62 17.11 2.28 19.35 1.98 21.86
1050.00 3.78 12.14 3.18 14.29 2.67 16.77 2.24 19.64 1.87 22.94 1.56 26.73
1075.00 3.64 12.58 2.96 15.31 2.39 18.57 1.92 22.43 1.54 27.01 1.22 32.42
1100.00 3.51 13.01 2.75 16.37 2.13 20.49 1.65 25.51 1.26 31.62 0.96 39.02

The purpose of this spread sheet is to estimate the maximum & minimum values of $FAS & $FAZ (or any leveraged ETF of one's choosing) that one might
reasonably expect to encounter upon the return of the broader $SPX market (or any index of one's choosing) to different levels; the spreadsheet is thus
general purpose and includes a number of input variables. The spread sheet uses as input the range of the market index for which one would like to
estimate potential values of the leveraged index, and divides that range into 20 equal steps. In the default spreadsheet, we ask what values of $FAS &
$FAZ might occur for values of the $SPX between 600 & 1100.

Due to the affects of compounding, the maximum change in the leveraged ETFs will occur if the change occurs over several days and not all at once, and
this rate of change is measured by the "Days to Reach $SPX Level" variable. Furthermore, due to the affects of decay, the maximum $FAS $FAZ change
will occur if those days are all either all up or all down & that each of those changes are of equal magnitude. The spread sheet uses this information to
calculate the resulting compounded rate of change in the broad index (in this case $SPX) itself to reach each level. Note that the spread sheet is
calculating the rate of change to reach each level in the same number of days, and not that it takes X days to reach the first level, and then another X days
to reach the second level, etc.

The relative performance of the underlying index of the leveraged ETF in relationship to the broader market index is also an important factor to consider.
Over a "sufficiently long period of time", one can assume that any sector will generally perform "in-line" with the broader market, but this is certainly not the
case over shorter periods of time. The spread sheet calculates potential maximum/minimum values of $FAS $FAZ against six different levels of relative
performance - 0.5x, 1x, 1.5x, 2x, 2.5x, and 3x as initially set, but these values can be changed as appropriate. Thus, if the daily change in the broad market
index is 5%, the ETF is using 3x leverage, and the index underlying that ETF is performing at a 2:1 ratio to the broad market index, the daily change in the
ETF itself is .05(3)(2) = 30%.

Please note that given the general purpose nature of the calculations, one can arbitrarily estimate the level of any leveraged ETF pairs (i.e., not just $FAS /
$FAZ, but also $BGU / $BGZ, $TNA / $TZA, $TYH / $TYP, etc) against any arbitrary index (i.e., not just $SPX, but also $QQQQ, $DJIA, $XLF, etc.). Also
note that if one is estimating the level of a leveraged ETF pair against the actual underlying index of that pair (e.g. the level of $FAS & $FAZ against the
Russell 1000 Financial Services Index), only the "1.0 Relative Performance Column" has any validity.
 Estimated Values of $FAZ for Different Levels of Relative Financial Performance Against $SPX
(Assuming Specific Current Values of $SPX and $FAZ)
55.00
52.50
50.00
47.50
45.00
42.50
40.00
37.50
Estimated $FAZ Value

35.00
32.50 Column D
30.00 Column F
27.50 Column H
25.00 Column J
22.50 Column L
20.00 Column N
17.50
15.00
12.50
10.00
7.50
5.00
2.50
0.00
600. 625. 650. 675. 700. 725. 750. 775. 800. 825. 850. 875. 900. 925. 950. 975. 1 1 1 1 1
00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 000. 025. 050. 075. 100.
00 00 00 00 00
Future Value of $SPX
Column D
Column F
Column H
Column J
Column L
Column N
 Estimated Values of $FAS for Different Levels of Relative Financial Performance Against $SPX
(Assuming Specific Current Values of $SPX and $FAS)
40.00
37.50
35.00
32.50
30.00
27.50
Estimated $FAS Value

25.00
Column E
22.50 Column G
20.00 Column I
17.50 Column K
Column M
15.00
Column O
12.50
10.00
7.50
5.00
2.50
0.00
600. 625. 650. 675. 700. 725. 750. 775. 800. 825. 850. 875. 900. 925. 950. 975. 1 1 1 1 1
00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 000. 025. 050. 075. 100.
00 00 00 00 00
Future Value of $SPX
olumn E
olumn G
olumn I
olumn K
olumn M
olumn O