I saw this question Why are daily rebalanced inverse/leveraged ETFs bad for long term investing?
And from the answers it looks like everyone agrees they're a bad idea, however the graph on SPXU for example currently looks like it's shooting up to the moon. Do people not like them because they tend to be volatile? In a bear market though, they tend to rise so why's it bad?
The top and bottom of a bear market are known only after the fact. By suggesting that you can be confident that a bear market will continue, you run afoul of the efficient market hypothesis. We know that stocks have gone down but not where they will go from here. The words "ride" and "shooting" imply that you attribute momentum or trend persistence to the market, by analogy to "inertial motion" of large physical objects. Rather, the efficient market hypothesis says that the market moves in a random walk or "Brownian motion", as microscopic particles do, and any "trend" can only be seen in retrospect.
If an ETF moves up X percent one day and then drops the same amount the next day, the result is a loss, even though the underlying recovered the same percentage. This is called beta slippage. If this were to occur over a long period of time, the leveraged loss would be significant. Volatility is the enemy of leveraged ETFs. Leveraged funds have to rebalance daily and that has an expense cost. These two factors result in a lot of leveraged ETF under performance.
However, if the underlying trends, beta slippage is less of a factor, possibly very little at all. In such trending periods, the leveraged ETF often meets the 2X or 3X benchmark and sometimes it beats.
In a bear market stocks can reach a bottom and then just float near the bottom for a long period of time. Then the leveraged position does have an ongoing cost. But then consider the leveraged position as a hedge to another position that has a high dividend and there is a difference between hedging and speculating.
Also an inverse ETF leveraged three-times tends to lose correlation with fluctuation. A non-leveraged inverse ETF is actually much better.
