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Direxion Triple Leverage ETF’s

Just when you thought it was a gamble to invest in horizon beta pro double ETF’s, I’ve discovered a new set of ETF’s by Direxion that offer 3x the leverage (thanks Dave @ Canadian Money Forum).

For those of you new to leveraged ETFs, they are Exchange Traded Funds that multiply the exposure of the underlying index via built-in leveraging. Leveraged exposure means that the investor can potentially reap increased gains of the index OR an increased loss.  In the case of the Direxion triple ETFs, the investor/trader/gambler gets 3 times the exposure.

Here are the triple ETFs that Direxion offers (US market):

Index Covered Ticker (Bull/Bear)
MER
Russell 1000 (Large Cap) BGU/BGZ 0.95%
Russell Midcap Index MWJ/MWN 0.95%
Russel 2000 (Small Cap) TNA/TZA 0.95%
Russell 1000 Energy ERX/ERY 0.95%
Russell 1000 Financial Services FAS/FAZ 0.95%
MSCI US REIT Index DRN/DRV 0.95%
Russell 1000 Technology Index TYH/TYP 0.95%
MSCI EAFE Index DZK/DPK 0.95%
MSCI Emerging Markets Index EDC/EDZ 0.95%
NYSE Arca 10 Year US Treasury Index TYD/TYO 0.95%
NYSE Arca 30 Year US Treasury Index TMF/TMV 0.95%

The volatility offered by these ETFs are enough to make even the most seasoned investor feel queasy, which is why they are the most popular with day traders.  If you take a look at the chart below, you can see first hand what I mean by volatile.

FAS (Russell 1000 Financial Services 3X) Chart (click for larger image)

fas

In this example, the ETF (FAS), has gone from a low of $11.59 in March to almost $80 in August.  Quite the gain for someone willing to trade this juiced ETF.  On the other side of the coin, imagine those who thought it was a trading at a discount in December, purchased @ $163.17 and ended up cutting their losses in March…. Ouch!

Remember, with any leverage, the gains and the losses are amplified and only those with the highest risk tolerance should consider trading these super leveraged ETFs.

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20 Comments

  1. Timbucthree on August 19, 2009 at 10:22 am

    I would suggest only using these double and triple leverage products in a swing or day trade scenario. Alot of people forget that these products reset at the beginning of each trading day. For example you bought a triple leverage etf that was tracking an index, and the etf cost $100. If in the first trading day the index rose 25% you would have a gain of $75 ( $100 * 75%), making the etf price $175. Now if the index falls 25% the next day you would have a loss of $131.25 ($175 * 75%) making the etf price 43.75. So even though the index is sitting even over the two trading days you are down $56.25. When using these double and triple leverage products I get out of my position by the end of the trading day.

  2. Matt on August 19, 2009 at 10:30 am

    I agree with TImbuthree and I also recommend tight stops.

  3. Cynthia on August 19, 2009 at 12:36 pm

    For some reason I have always been afriad of ETF’s but I may have to make the jump or leap of faith after reading this : )

  4. Adrian on August 19, 2009 at 12:49 pm

    Timbucthree, if the index roses 25% and then falls 25% it ends up lower and the triple leverage etf reflects that, so there is no need to get out of your position at the end of the day (unless there are other reasons to do that). I agree that due to their volatility, these products are best for speculative, short-time trading.

  5. Timbucthree on August 19, 2009 at 2:04 pm

    Adrian, true day trader’s hardly ever hold on to a position over night. You are trying to catch the up days exiting the position and getting back in at a lower point. If you continue with my example and had another 25% up day the etf price would be at about $70. With the index up 25% you are still down 30% with your position if you held your position over the three days. Essentially you are trying to catch all the 25% up days without getting stung by the 25% down days. If you hold your position over time the down days will eat away at your up day gains losing you money even if the index has a good run. If you were going to hold you position for a long term investment I suggest the 1-1 or non-leveraged etf.

  6. YYC27 on August 19, 2009 at 2:35 pm

    Timbucthree:

    I think you’re misunderstanding the math. These products don’t “reset” each day. You’re just looking at day-over-day +/- %’s. Rising 25% one day, and falling 25% the next does ~not~ mean the index was “even” over those two days. Each day builds on the next. You can’t just add the numbers up.

  7. Timbucthree on August 19, 2009 at 3:03 pm

    YYC27, I am just using rough basic math to show how holding a leveraged etf that tracks somerthing with voliltilty regularly over time will equal a losing position, even if the index that the etf is tracking is higher then when you first entered the positon.
    Take a look at HOU which tracks crude futures (double leveraged). When the price of crude was around the $35-40 mark HOU was trading at around 14.00. Crude is now around $70 and HOU is trading at $9.50. If you were holding HOU long term to try to catch double the upswing of the rise of crude you would be down about 30% with crude being up 50%

  8. The Machine on August 19, 2009 at 5:46 pm

    If you read the prospectus for these funds – which any investor should so that they are only investing in products they understand, one would see that the funds are meant to track the performance x3 on a daily basis and that daily resets are done based on the markets movements. Returns are thus compunded daily as opposed to annually for most fund returns.
    These can be easily misunderstood as Timbucthree has pointed out. These are great short-term speculative positions when you make the right call, not so good when you are wrong!

  9. YYC27 on August 19, 2009 at 6:30 pm

    I read through one of the prospectuses, earlier today, and now I understand what you’re talking about with it “resetting”. Each day, they rebalance the leverage to get back to the 3:1 securities:net asset ratio, and this distorts the returns when the market is doing anything other than consistently heading in one direction.

  10. Ed Rempel on August 19, 2009 at 10:42 pm

    Hi Timbucthree,

    I agree. This type of investment is not suitable for a long term hold. It will likely go down, even if the underlying index is rising.

    To show the correct math on your example, if the index rises 25% and then falls back to 100 (a 20% decline), then this ETF would rise to 175 (25% x 3) and then fall 60% (3 x 20%) from 175 to 70.

    In short, the index goes from 100 to 125 to 100, but this ETF will go from 100 to 175 to 70. Your return is a 30% loss while the index was flat. Note this is before fees.

    A more extreme example is if the index goes from 100 to 67 and then back up to 100. This ETF will fall from 100 to 0 and then stay there. This is a 100% loss while the index was flat.

    The same effect happens with the 2x ETFs.

    Ed

  11. cannon_fodder on August 20, 2009 at 2:11 am

    There’s a problem with any of these ETF’s… they trade at a price that the market determines. There is no one entity looking at the underlying price of the index and setting the price instantly. The price is determined by individuals trading the ETF – that is why sometimes you might see both the Bull & Bear on either the positive or the negative side simultaneously (although this is usually only when the underlying index has moved slightly).

    The second is that the ETF has a drag on its tracking the underlying index. This is why I believe there is a potential long term strategy for these ETFs. It is based on empirical evidence that these 2x or 3x ETFs have a tracking error such that moves up are always a little less and moves down are always a little more than intended. Pick a direction that you think the underlying index will move and sell short the opposite ETF.

    For example, a year ago you thought that the S&P 500 was overpriced and should move lower. Instead of buying a 2x or 3x Bear on the S&P, you short the 2x or 3x Bull. Over the next year, the S&P index was down about 20%. If you had purchased Proshares 2x Bear you would be DOWN about 30% (huh?!). On the other hand, if you had shorted the 2x Bull you would be UP about 50%.

    Thus, even if you had guessed horribly, terribly wrong and though the S&P was going to move higher, and thus shorted the S&P Bear, you would be up 30%.

    I’ve not done extensive analysis, but it is a strategy I’ve recently adopted for small positions to see if theory put into practice yields expected results.

  12. Smac20 on August 21, 2009 at 11:51 am

    The great thing about higher leveraged ETFs is the added rebalancing costs. This may sound counter productive, but look at it from another stance. For example, if you feel bearish on oil buy put options on the 3x oil bull index. This way whether you are right or wrong the value of the ETF will decline by the amount of the rebalancing costs over the period. If you are right then you get a little extra gravy profit.

  13. Ed Rempel on August 23, 2009 at 5:16 pm

    Hi Cannon,

    Do you not think that shorting a triple ETF is way to risky?

    The worst case scenario with buying them is that if the index moves against you by 33%, then you lose 100% and are wiped out.

    However, if you short them, then the risk is unlimited x 3. If the market moves 100% against you, then you are out 300%. This means that if you sell short for $10,000, you would need $30,000 to get out of it.

    Especially shorting the 3 times bull would be scary, since the market is does rise in the long run. Shorting it for any length of time means losing 100% is not merely possible – but probable.

    Do you have a way to protect against this extreme risk, Cannon?

    Ed

  14. cannon_fodder on August 23, 2009 at 9:42 pm

    Ed,

    I certainly wouldn’t advocate putting an inordinate amount of money in any leveraged ETF.

    From what I’ve seen, the extreme scenarios which are often touted don’t match the theory.

    One example I could come up with (since they are relatively new) is comparing XIU to HXU. Adjusting for splits and dividends, from May 08, 2008 to March 2, 2009 the XIU was down about 48%. HXU was only down about 78%, not 96%. HXD, the inverse of HXU, was up 121%.

    If you had bought 900 shares of HXD and bought 400 shares of HXU in May 2008 your outlay would be about the same $14,400 in each case. In March 2009 you could have closed out your positions and been up about $17k on your HXD and down about $11,200 on your HXU.

    SSO and SDS are 2x leverages on the S&P500. Same timeframe: buy 300 of the SSO (Bull) and 500 of SDS (Bear) for an investment of about $22,500 in each. You would be down about $18k and up about $33k on the SDS.

    On the other hand, if you bought 200 SDS and 900 SSO at March 2 2009 (investing about $22.5k in each) you would be down about $14k on SDS but up about $16k on SSO.

    It wouldn’t surprise me that if you invested in equal amounts in leveraged ETFs both Bear and Bull components you will eventually come out ahead due to the drag. And, if you have a long term view, it would be better to short the Bear rather than buy the long.

  15. Frank on August 26, 2009 at 11:37 pm

    3x etf from Direxion is a scam. STAY AWAY. The decaying value is fraudulent.

    FAS and FAZ both did reverse splits as the were both down 80% in June. Look it up. The real facts. Not this article of nonsense.

  16. Mark Wolfinger on August 28, 2009 at 1:31 am

    These Leveraged ETFs are poison and the people who manage them are bloodsuckers.

    The ignorant – and that’s not meant to be disrespectful – the truth is that most individual investors are ignorant – simply don’t know that these instruments are for day traders only.

    But Direxion and others of their ilk know it. And they choose to profit from them. Despicable.

  17. cannon_fodder on October 22, 2009 at 8:05 pm

    Looks like an industry columnist has discovered what I’ve been saying re: a winning strategy with this leveraged ETFs.

    http://www.canadianbusiness.com/markets/stocks/article.jsp?content=20091022_160526_756&utm_source=_BK4MzRB7wGPl5n&utm_content=mwnl15&utm_medium=email

  18. Kurt on September 16, 2010 at 3:49 am

    I love the Direxion triple leverage ETFs. Investors can make a lot of money off these, but they need to have an exit strategy prior to investing – investors cannot simply “buy and hold” these forever. During bull markets, the triple leverage bull ETFs have the potential to soar and if investors manage to sell during a bull stretch, they can make serious catch. However, if you hold for too long, you’ll eventually experience a bear market that will quickly destroy accumulated gains.

  19. Ken on September 18, 2010 at 7:42 pm

    I am new to this. Can someone help me if this stretegy looks o.k..

    Market all over the world is rising for now. Sooner or later there will be a bear market. So, If I keep on invesingt under systematic investment plan in this bear fund (Direxion Daily Large Cap Bear 3X) as a hedge against recession, How about that ? Because in the midst of recession (March 09) this fund reached to 110.

  20. Eric on May 3, 2011 at 11:45 am

    Ken,

    Read the above posts for more information, but there is a certain amount of decaying value that is detrimental to these funds. I’ve been investing in these with some success this year, but they should not be a part of anyone’s long position. If you think the market is going to tank tomorrow, then hop in… if you think it’s still 6 months away, then maybe you should find another non-leveraged fund to take advantage of.

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