Had Enough Volatility Yet? Direxion Set To Launch 3X Leveraged ETFs

As Clint Eastwood might say, "Are you feeling lucky?"

At a time when many investors are hoping for a bottom in this year's plummeting stock markets, Direxion Funds says it's ready to come out with eight new leveraged and inverse exchange-traded funds. (See charts below).

But these ETFs won't just offer a bit more juice. They're set to become the first to offer three-times the leveraging power of their underlying benchmarks.

Direxion says that the eight 3x leveraged ETFs should launch on Wednesday. They're part of some 36 in the works. (See related story here.)

"Do you have an opinion on the direction of the market? Maybe you are interested in overweighting or under-weighting a certain sector. Direxion Shares powerful 3x leverage (the highest in the ETF and mutual fund industry) seeks to amplify the performance (positively or negatively) of your investment capital by 300%," said the company in recent marketing material made available to investors.

For example, if the Russell 1000 Index gains 1% in a trading session, the Direxion Large Cap Bull 3x ETF is designed to gain 3%. On the other hand, the Direxion Large Cap Bear 3x ETF would move in just the opposite direction. If the same Russell index fell 1%, the ETF's goal would be to gain about 3%.

The new ETFs are listed with net expense ratios of 0.95% per year. (The prospectus for the new ETFs can be found here.)  

Half of the initial eight hitting the market later this week will provide 3x leveraged exposure. The other four will offer 300% inverse exposure.

If you’re a 300% bull type needing a bit more leverage …

Name	Symbol	Index	Daily Exposure Target
Large Cap Bull 3x	BGU	Russell 1000	300%
Small Cap Bull 3x	TNA	Russell 2000	300%
Energy Bull 3x	ERX	Russell 1000 Energy	300%
Financial Bull 3x	FAS	Russell 1000 Financials	300%

And if you’re a 300% bear looking for inverse juice …

Name	Symbol	Index	Daily Exposure Target
Large Cap Bear 3x	BGZ	Russell 1000	-300%
Small Cap Bear 3x	TZA	Russell 2000	-300%
Energy Bear 3x	ERY	Russell 1000 Energy	-300%
Financial Bear 3x	FAZ	Russell 1000 Financials	-300%

Source: Direxionshares.com

• More on choosing the right ETF

Comments

[Hedged In]

How do the expense ratios compare to the Proshares leveraged ETFs?

2008 Nov 03 04:14 PM

[Dan Weiss]

These are very interesting for short-term moves but the problem is in the math for longer term. As an example lets say over a week the returns of an index are 2%, 3%, -3%, 1%, -4%: in this case the index would be down 1.2% but a triple etf would be down 4.7% (nearly 4x the amount due to the daily rule), meanwhile the triple inverse ETF would only be up by 1.3%. This may be a extreme example but it shows some of the danger of investing in the leveraged ETF's if markets are not heavily trending.

2008 Nov 03 07:17 PM

[NOWHEREMAN]

Thank you, thank you, thank you.

As traders you may see a problem, as an investor I see a tremendous buying opportunity, which just added 50% to the Ultra longs I was considering.

2008 Nov 04 10:01 AM

[Smarty_Pants]

When do they start trading options on these 3x ETFs?

Can't have too much leverage if you're right, or if you're a bank and deemed too big to fail.

2008 Nov 05 03:54 PM

[Smarty_Pants]

Dan: Don't get led too far astray by the numbers. The same holds true for unleveraged ETFs.

If you lose 25% of your money, you have to gain 33% to get back to break even. Lose 50% and you need to gain 100% to break even.

Same will be true of the leveraged ETFs, just that the swings in each direction will be larger.

The difficult question is what happens if the underlying loses 35% of its value? Does the 3x ETF go bankrupt? Probably not. It would depend on how they implement their leverage.

It's probably a good question to ask Direxion though.

2008 Nov 05 04:00 PM

[Smarty_Pants]

If you want 3x leverage open a futures account and buy/sell one e-mini S&P 500 for every $15,000 in your acccount.

2008 Nov 05 04:04 PM

[NOWHEREMAN]

Options/futures expire. Insurance which does not have an expiration date=ETFs.

Meanwhile, you can buy/sell calls/puts on your position depending on the purchased ETF's sector direction if you want to trade. I don't.

My choice is ERX. Regardless of market fluctuations, future growth will involve an increase in oil usage, demand destruction will be replaced by demand. Buy and forget about.

2008 Nov 06 10:22 AM

[Bob'29]

FORTHCOMING CLASS ACTION LAWSUIT?: There have been two salient pieces of analyst insight into Direxion Funds that portray a picture of malific manipulation on the part of the Funds. One by Jim Cramer in a rant that these should be illegal, because they dump shares at the end of the trading day. This means that if you are not a day trader; there is no correlation to the related index that these funds portend to follow. There was another another piece that demonstrated this graphically by charting both a long and a short Direxion ETF against their followed index. BOTH the long and the short were BELOW the index after the charted period of time. Lets look for our letters asking for our participation in the legal action.

2008 Dec 08 12:40 PM