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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.

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Related Posts:

Fat Tails and Expecting the Unexpected

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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.

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