Sell Stops For Ultra ETFs

For most of the past week, I have discussed sells stops and responded to various reader questions. Here’s David’s comment:

I enjoy reading your blog and have three ETF questions for you.

1. Since these funds are twice as volatile as the indexes they track, should my stops be 7% or 14%? (At this point I would make over 35% on all three at 14%).

2. Since I invested in several lots should I sell all at my stop point or have several different stops, perhaps tied somehow to the price of each lot and number of shares?

3. If your answer to question 2 is sell all and I get whip-sawed, should I get back in incrementally when a new high is reached or reinvest the entire amount from the stop sale and then get back on my monthly investment program?

I do not use Ultra ETFs personally or in my advisor practice. The reason is the added volatility, which makes it more difficult to apply the concept of trend tracking along with trailing sell stops. However, since you asked, here’s my response to your questions:

1. You have a nice profit built up and are obviously aware that it can evaporate in a hurry if the market turns. A common belief says that the higher your unrealized gains, the further back you can trail your stop loss points. That may apply to some but not to others. Your risk tolerance definitely comes into play here. If you’re comfortable giving up 14%, then that’s what you should do. If not, use 7%; you only can make that decision.

2. Since all of your positions have rallied, there is only one high price from which to measure the drawdown to your eventual sell point. When a sell stop gets triggered, I liquidate all holdings of that ETF.

3. Since you are using leveraged ETFs, I personally would use the incremental buying process and ease back into the market in 1/3 increments or whatever percentage you are comfortable with.

You have experienced how leverage can work in your favor. Do not become complacent thinking it will always work this way, because it won’t. Nevertheless, you took advantage by using the tools available to maximize your returns during this bullish rebound. Congratulations!