“Today I reviewed the portfolio of an older gentleman, who I will call “Mr. X”. He owns exclusively leveraged ETFs in an account that he hopes to use to generate income. I imagine most investors subscribed to RealMoney are already feeling woozy at the mere thought. Like many investors, Mr. X reached retirement and took over the reins of his portfolio to keep busy. During the 2008 meltdown, Mr. X was slow to believe in the bear market and ended up hemorrhaging savings. Also slow to react to the economic recovery, Mr. X has now poured funds into leveraged ETFs in an attempt to make up quickly for lost time,” Don Dion Reports From The Street.
Dion goes on to say, “This is the wrong way to approach the leveraged ETF industry — or any type of investing, for that matter. Leveraged ETFs, like Direxion’s Daily Financial Bull 3X (NYSE:FAS), or the ProShares UltraShort S&P 500 ETF (NYSE:SDS) are designed for sophisticated investors making short-term trades. In some portfolio strategies, they have been very effective. Unfortunately, many investors, like Mr. X, use leveraged ETFs to gamble on market movement, hoping to double or triple returns.”
“As RealMoney investors know, most leveraged ETFs have daily tracking strategies, so compounding error can cause serious portfolio damage over time, especially in volatile markets. Frustrated that funds like Direxion Daily Small Cap Bear (NYSE:TZA) didn’t appear to be tracking their objectives over longer periods, Mr. X finally realized that things were getting out of hand. I’m sure that many of you know investors like Mr. X, or know of people who have felt “duped” by complex investments they don’t understand. I’m here to tell you that ETF products will become even more complex, not less, and that doubling down on market movements isn’t the only way to make money at a decent pace,” Dion Reports.
Some consider these leveraged products for PRO investors only, while many retail investors use them and have had their trading luck swing in either direction. We came across a video from CNBC with Jeff Cox referring to the leveraged ETFs as “Triple X ETFs” and that they should only be used by professional investors. See the interesting video below:
We have put together some more details on the Direxion’s Daily Financial Bull 3X ETF (NYSE:FAS), ProShares UltraShort S&P 500 ETF (NYSE:SDS), and the Direxion Daily Small Cap Bear ETF (NYSE:TZA) below for you to take a look at.
Direxion’s Daily Financial Bull 3X ETF (NYSE:FAS) Vist Our FAS Category: HERE
The Financial Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the price performance of the Russell 1000® Financial Services Index (“Financial Index”). There is no guarantee the fund will meet its stated investment objective. The Russell 1000® Financial Services Index is a capitalization-weighted index of companies that provide financial services. As of April 30, 2008, the Index had 227 components, derived from the Russell 1000 Index with an average market capitalization of over $11 billion dollars and a median market capitalization of $4.4 billion dollars. One cannot directly invest in an Index.
ProShares UltraShort S&P 500 ETF (NYSE:SDS) Vist Our SDS Category: HERE
The investment seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the S&P 500 index. The fund invests in derivatives that advisors believes should have similar daily return characteristics as twice (200%) the inverse of the daily performance of the Index. It invests typically the rest of the assets in money market instruments. The fund is nondiversified.
Direxion Daily Small Cap Bear ETF (NYSE:TZA) Vist Our TZA Category: HERE
The fund seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the Russell 2000 index. The fund normally creates short positions by investing at least 80% of net assets in financial instruments that, in combination, provide leveraged and unleveraged exposure to the index. It is nondiversified.