With The Market On The Verge Of Another Freefall, Investors Turn To Leveraged ETFs (SKF, DIG, DUG, FAS, FAZ, UYG, UWM, TWM)

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August 25, 2010 10:58am NYSE:DIG NYSE:DUG

“With the market apparently on the verge of another freefall, aggressive investors are once more looking at the promise of leveraged ETFs to try to multiply their gains from a big move in the


 market. Yet 2010 has once again shown how trying to turn leveraged ETFs into a long-term play on an investment trend can turn out very badly — even if you pick the direction of the market correctly,” Dan Caplinger Reports From The Motley Fool.

“For those who buy leveraged ETFs, the best possible outcome is for whatever market the ETF tracks to move sharply and quickly in the correct direction. For instance, during the 2008 financial crisis, after Congress passed the bailout bill, those who bet against financial stocks using the ProShares UltraShort Financials (NYSE: SKF)in early November more than doubled their money in just a few weeks. That’s because financials pretty much headed straight down during that period. The problem with most leveraged ETFs, though, is that they aren’t able to handle markets that zig and zag back and forth. And after 2009’s powerful rally that had stocks moving mostly straight up, we’re now in exactly the sort of market that really punishes leveraged ETFs,” Caplinger Reports.

Caplinger points out some examples:

  • Over the past year, the price of oil has stayed in a fairly narrow range between $65 and $85 per barrel and is roughly unchanged since last summer. But no matter which way you thought oil and gas stocks would move, using leveraged ETFs to invest long-term has been a losing proposition: The bullish ProShares Ultra Oil & Gas (NYSE:DIG) is down 12% from a year ago, while the bearish ProShares UltraShort Oil & Gas (NYSE:DUG) has lost 13%.
  • Financial stocks have been all over the map over the past year, and leveraged ETFs haven’t responded well. The ProShares bearish leveraged ETF has lost 14% in the past year, while the bullish ProShares Ultra Financials (NYSE:UYG) is off 15%. The triple-leveraged Direxion Daily Financial Bull 3x (NYSE:FAS) and Direxion Daily Financial Bear 3x (NYSE:FAZ) pair have done even worse, down 31% and 28% respectively.
  • Small-cap stocks have been particularly volatile in both directions. Yet with the Russell 2000 up around 3% in the past 12 months, you might expect better than a 0.3% loss from the double-leveraged ProShares Ultra Russell 2000 (NYSE:UWM). Meanwhile, the bearish analogue, ProShares UltraShort Russell 200 (NYSE:TWM), has fallen 25%.

Caplinger goes on to say, “You can’t really blame ProShares or any other leveraged ETF provider for these results. They’re a natural mathematical consequence of how these ETFs are structured. By focusing on short-term daily returns, these ETF providers have created funds that are completely unsuitable for long-term investors and that lead to the poor results above and many like them. With leveraged ETFs, it pays to listen to the disclosures that the ETF companies themselves are now providing, thanks to a little SEC coaxing. The daily reset puts long-term investors in serious danger of losing their money even when they’re right about the general direction a particular market moves in.”

Feel free to view our categories for each ETF listed in the article for more insight.

  • ProShares UltraShort Financials (NYSE: SKF)  Visit Our (SKF) Category: HERE
  • ProShares UltraShort Oil & Gas (NYSE:DUG)  Visit Our (DUG) Category: HERE
  • ProShares Ultra Oil & Gas (NYSE:DIG)  Visit Our (DIG) Category: HERE
  • ProShares Ultra Financials (NYSE:UYG)  Visit Our (UYG) Category: HERE
  • Direxion Daily Financial Bull 3x (NYSE:FAS)  Visit Our (FAS) Category: HERE
  • Direxion Daily Financial Bear 3x (NYSE:FAZ)  Visit Our (FAZ) Category: HERE
  • ProShares Ultra Russell 2000 (NYSE:UWM)  Visit Our (UYM) Category: HERE
  • ProShares UltraShort Russell 200 (NYSE:TWM)  Visit Our (TWM) Category: HERE

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