Those that are fervent traders using leverage for anything longer than a day’s time is better off using a margin account, says Paul Justice for Morningstar.

Leveraged and short ETFs work better on a day-to-day basis, but over time, there tends to be tracking error as daily compounding takes a toll.  These funds are not meant to be bought and held.

A case in point that demonstrates the divergence over time is the MSCI emerging market versus leveraged ETFs. Vanguard Emerging Markets Stock ETF (VWO) tracks the index and has lost value, Short MSCI Emerging Markets ProShares (EUM) provides the inverse of the index and has gained value, but UltraShort MSCI Emerging Markets ProShares (EEV) has lost value over the same period as the other emerging market ETFs.

Another example in the energy sector with sister funds Ultra Oil & Gas ProShares (DIG) and UltraShort Oil & Gas ProShares (DUG). They have worked like they were supposed to, and consequently also lost in the long-term.

It is the common misconception that since it is “Ultra” or “Double” something then it should also provide double that of the returns or loses for those long investments. So how do they work? The fund’s fine print promises twice the daily return of the index, and the key word here is “daily.” By holding onto these ETFs for longer than their indicated compounding period mathematically guarantees one’s return would not double that of the index. The odds of getting nothing close to double the return increases the longer the ETF is held.

Back in November, Direxion introduced the triple-leveraged exchange traded fund, and the market embraced its new play toy. As market volatility has reigned in the last year, these types of funds are generating all kinds of interest and have been the subject of many back-and-forth debates.

Or take here is that not all products are right for all investors, but for investors looking for a hedge, these funds could have a home in their portfolios. The many available different long/short ETFs have a home in a portfolio if the user understands them, knows the risks and has decided he or she can handle it any volatility that comes along with them.

Oil is heading toward $50 per barrel and there’s sentiment that any OPEC production cuts will not be able to stop this slip downward, reports Andrew Snyder for Contrarian Profits.

An ETF to help you profit from oil’s downturn is the ProShares UltraShort Oil and Gas (DUG). Year-to-date, the fund is up 32.6% and it’s number 12 in trading volume, according to the Morningstar rankings. It currently holds $942 million in assets.

Oil prices are dropping rapidly (below $68 a barrel today), so OPEC is meeting this week to discuss a cut to pumping quotas. It is a last-ditch effort to try to keep crude prices from plummeting all the way to $40.

The cartel is expected to reduce production output by as much as two million barrels per day, which would be considered a major cut. There are even rumors that Russia may reduce its output as well, leaving many to wonder if countries that are rich off petro dollars will be able to sustain their lifestyle.

Timothy R.  Homan and Courtney Schlisserman of Bloomberg report that in the last month, gasoline is down 6%, copper is down 14% and corn 26%.  These lower prices helped diminish some of the threat to the economy.   But consumers may not be ready to jump right in and spend, as unemployment is still rising and property values falling.  The survey did find a drop in consumers’ expectation of inflation for the next 12 months. 

Motor vehicles and parts helped manufacturing as The Federal Reserve reported that industrial production was up 0.2% in July, according to Martin Crutsinger of AP.  The increased auto activity was due to the resolution of a three-month strike at GM’s largest axle supplier.  Industrial production also did well due to exports.

Oil and other commodity prices continue to decline today, easing investor concerns that high energy prices would mean consumers would keep cutting their discretionary spending.

Some ETFs that are reacting to the new include:

• PowerShares DB Agriculture Double Short ETN (AGA), up 6.5% in intra-day trading; down 5.3% for past 3-months
• Rydex S&P Equal Weight Consumer Discretionary (RCD), up 6.4% in intra-day trading; down 11.2% year-to-date
• ProShares UltraShort Oil & Gas (DUG), up 3.5% in intra-day trading; down 26.7% year-to-date

 Read the disclosure, as Tom Lydon is a board member of Rydex Investments.

It’s been a challenge in the markets and exchange traded fund (ETF) realm lately, to put it mildly.

Things have picked up some in recent days, but as today illustrates: we’re not out of the woods yet. Have you got some kind of plan?

Glen Rogers for seeking Alpha gives us five of his ideas, and we add in some of our own thoughts, too:

• Raise cash: Reduce or sell some of your biggest gainers and losing stocks that are not going to rebound any time soon. Get out of any positions that have declined 8% or more off their highs or dropped below their 200-day moving averages.
• Hedge your energy position: Reduce positions in energy-related stocks and think about a short oil or gas ETF, such as ProShares Ultra Short Oil & Gas (DUG). Many fuel-related ETFs have declined in the last week and month, some significantly off their recent highs.
• Hedge your basic materials position: While this may not be a strategy for every investor, there are plenty of opportunities with ProShares or Rydex. Just be aware of the risks before you get in.
• Start rotating into health care/start buying financials: This sector may be ready to turn around as it has been badly beaten. And every body needs health care, even in an economic downturn. As with any kind of investment, though, we don’t recommend buying before they’ve crossed their trend lines. Financials in particular may have had a good run recently, but they’ve still got a ways to go.