Triple Leveraged ETFs On Fire

Since 2x ETFs, which give investors twice the returns of the underlying index, weren't enough for profit-hungry traders, Direxion released 3x ETFs earlier this month that track the Russell 1,000, Russell 2,000, and Energy and Financial sectors. These ETFs try their hardest to achieve 3 times the daily change (straight up and inverse) of the indices they track. Below we highlight the eight 3x ETFs that have been released by Direxion so far.

click to enlarge

Although they've been trading for less than a month, the 3x ETFs have already become very popular trading vehicles. And with a market that is averaging a daily change of nearly 4%, these ETFs have already taken traders for a wild ride. Below we highlight price and volume charts of the 3x long and inverse Russell 1,000 and Financial ETFs. As shown, volume has picked up significantly in recent days for all of these 3x ETFs, reaching 10,000,000+ shares per day in some instances.

But the percentage change in these ETFs is what is really crazy. The inverse 3x Russell 1,000 ETF (BGZ) has already had a rally of 114% and a decline of 42% since trading began on November 5th! The Financial ETFs have been even crazier. The 3x long Financial ETF (FAS) declined 80% from its high on 11/10 to its low last Friday. Since then, it's already up 127%! The inverse one has been even crazier. From 11/6 to its high last Friday, FAZ went from $60 to $200 (235%). Since then, it has gone from $200 back down to $70 (-67%).

Many have argued that these ETFs are contributing to the volatility of the market due to their leverage. While the huge swings in these things are tempting, the losses can pile up fast with just one bad trade. For the last several months, we have learned how excess leverage has threatened the entire system. After all of this, what kind of message does it send to start creating securities that allow anyone, regardless of their investment experience, to leverage up three times with the simple click of a mouse? Before the introduction of these ETFs, the only way for an individual to increase leverage was through margin borrowing or option trading. Both of these require the brokerage to clearly highlight the potential risks and the investor to acknowledge them. Yet with these ETFs, some investors are potentially leveraging up without knowing the risks involved.

As the popularity of these ETFs grows, it's likely that their marketers will only roll out products with more and more leverage. 4x? 5x? Where does it stop? In time, this will only increase volatility and the potential problems for the holders of these ETFs, as well as the systemic risk to the market overall.

Comments

[Brad Ferris:]

Only 3x? That's hardly worth the effort. I'd have to leverage those up at least 100 times to even be close to on par with what the investment banks were doing only a few short years ago ;) (haha)

2008 Nov 26 01:01 PM

[SgtSally:]

I use my margin acount to buy these.

2008 Nov 26 01:20 PM

[Aru:]

They helped me to cut down my 50% loss and make little profit in this market

2008 Nov 26 01:32 PM

[ikkyu:]

Why not go long the 3x and short the -3x for some real leverage!

2008 Nov 26 08:36 PM

[happysoul77777:]

And the SEC said that the volatility has not risen!

By the way, I think these leveraged ETFs are great.

2008 Nov 26 09:45 PM

[smokey888:]

I would like to try one of these but I feel I need use some type of program to watch the movement of the market. Any suggestions would be appreciated.
[e-mail] (that's "smoked" w/ a "d", not a "y")

2008 Nov 27 10:00 AM

[Urbane Gori...:]

I'd noticed that DIG and DUG had both dropped, when they really should be trading opposite each other. I figured that many traders had jumped into the 3X products and depleted the buyer/seller volume for the Proshares 2X line.

jegan

2008 Nov 27 12:01 PM

[thyname:]

I suggest you open an account with Think or Swim. All real-time data are free to all clients, regardless of trading activity or account size. Great software!

On Nov 27 10:00 AM smokey888 wrote:

> I would like to try one of these but I feel I need use some type
> of program to watch the movement of the market. Any suggestions would
> be appreciated.
> [e-mail] (that's "smoked" w/ a "d", not a "y")

2008 Nov 27 01:39 PM

[thyname:]

thinkorswim.com

2008 Nov 27 01:40 PM

[Floyd Upperman:]

They say there is no free lunch.... Well, I think I might have just found one, at least for now anyhow. Decent leverage with no margins... And when the FAS gets extremely cheap, buying it is like buying a LEAP (CALL) on the market, only it never expires and cannot go to zero! All and all these things are pretty useful! I got to say I agree with Aru too, heck these things are turning a tough year into a decent one (in equities) so far anyhow.

Floyd Upperman
upperman.com
full-time trader

Mar 13 12:48 AM

[User 363398:]

I would support the use of thinkorswim before you start...

Mar 23 07:23 AM

[the_lazy_ob...:]

Since the downside cannot go more than 100%, while the upside can exceed 100%, if you buy both long and short of the ETFs that follow the same index (ex.: FAS and FAZ), you'd either end up even (minus a small commission) or in profit.

Mar 25 11:06 AM