Direxion Leveraged ETFs Win Fans Amid Market Volatility

Leveraged ETFs are among the more exotic options for traders right now, and it looks like they're proving more popular at a time when market volatility continues to rage. From the WSJ:

The funds "have gotten extremely fast pick-up in terms of trading and people talking about them," says Soren MacBeth, who runs the Web site StockTwits.com, which collects Twitter posts about investing.

Mr. MacBeth says after just a few weeks the Direxion funds have regularly cropped up among the 10 most discussed stocks on his Web site on any given day.

Exchange-traded funds resemble open-end mutual funds but trade on an exchange like a stock. Direxion's largest ETF, Large Cap Bull 3X Shares, which aims to offer investors a return equal to three times each day's percentage-point change in the Russell 1000 stock index, has $237 million in assets and average daily trading volume of 8.2 million shares, according to fund researcher Morningstar Inc.

I touched on leveraged funds in U.S. News' ETF investing guide, and took a look at the leverage question in ETF Investing: 5 Pitfalls to Avoid:

Leverage can be deceptive. Leveraged ETFs, designed to double or triple market moves (for example, if the Dow jumps 5 percent in a day, a two-times leverage fund would return 10 percent), have one big flaw: They're meant to track only a single day's trade, making them unsuitable for buy-and-hold investors. Mariana Bush, an analyst at Wachovia, recently tested various scenarios for three-times leverage funds and found returns over a set period could be gains or losses of more than 15 percent depending on daily volatility—even when the index tracked by the security returned 5 percent between the buy and sell date.

Basically, if you aren't day trading, these vehicles probably aren't for you. Still, if you're looking for a short-term thrill leveraged ETFs appear to some appeal among a surprising number of investors.

Comments

[User 86999:]

People need to be aware of the K-1 complexity issues involved, when the tax time arrives. The prospectus is silent but SAI includes information of how the funds are PTP or QPTP, which should generate K-1. Unfortunately, the prospectus does not clearly provide the information on of the tax form vehicle used: i.e. whether they'll issue 1099, the normal tax document or the K-1. I am looking for some credible site/article that may have compiled such information on all the financially engineered ETFs. We know what financial engineering has already done to us, but transparency is still an issue.

Jan 21 09:56 AM

[Fitz919:]

I don't see the concern. The bullish side consists of stocks, the bearish side is a complex mix of shorting, put options, and credit default swaps, designed to behave like the same stocks moving in mirror opposite.

When it comes to taxes, these are short term trades, therefore your gains are taxed as regular income, not at capital gains rates.

The newer triples don't pay dividends yet, but the doubles have been paying dividends on both the bullish and bearish sides for quite a while.

I see no reason to treat these differently than you would any normal dividend paying stock.


On Jan 21 09:56 AM User 86999 wrote:

> People need to be aware of the K-1 complexity issues involved, when
> the tax time arrives. The prospectus is silent but SAI includes information
> of how the funds are PTP or QPTP, which should generate K-1. Unfortunately,
> the prospectus does not clearly provide the information on of the
> tax form vehicle used: i.e. whether they'll issue 1099, the normal
> tax document or the K-1. I am looking for some credible site/article
> that may have compiled such information on all the financially engineered
> ETFs. We know what financial engineering has already done to us,
> but transparency is still an issue.

Jan 21 07:01 PM