Triple Leveraged ETFs

We know there has been no shortage of commentary written about the issues surrounding leveraged ETFs, but today's premarket trading in the financial sector triple leveraged ETFs from Direxion had us scratching out heads. As shown below, the triple leveraged bullish ETF (FAS) is trading up 4 cents, or 0.70%. At the same time, the triple leveraged bearish ETF (FAZ) is trading up 1.41%. Both ETFs are based on the same index, except that one is supposed to track the index while the other tracks the inverse of the index. We realize that trading can be volatile in the pre-market, but FAS has already traded over 2 million shares and FAZ has traded over 400K shares, so it's hard to blame this anomaly on illiquidity.

Comments

[squark62:]

the same thing happened with DIG & DUG (the ProShares 2X levered ETFs tracking oil service cos etc) from nov-08 to feb-09. the neutral pair trade is still underwater. don't really understand why either but i've been tracking this pair for over a year now. once this started happening, i liquidated my pairs trade on these two and stuck with SDS-SSO, DXD-DDM, QID-QLD. been doing quite well with these.

Mar 20 12:56 PM

[#1 etfexpert:]

it's because market makers aren't coming in to arb out the spread by creating/redeeming shares of the etf's. that's what keeps these in check relative to the underlying.

Mar 20 01:08 PM

[Conan the B...:]

If TALF/TARP work or if the BAC/C actually come out with earnings. FAS will take off.

What happened recently will just be an indicator of the future.

How about DOG?

Mar 20 01:18 PM

[Whitehawk:]

I've written in several SA comments about the decoupling of the 3x vehicles from the 3x leverage of their underlying indices. It has been evident in FAS/FAZ, and it also happens with some ETNs, like DXO/DTO (very obvious there). I agree with the market maker arb comment, but perhaps it is also because each are trading at a discount or premium now based on trader perception and the market makers can't keep up with it?

Mar 20 01:23 PM

[Leandro Taub:]

It is important to pay attention to the volume traded. FAS and FAZ operate with very little volume in pre-market. Anyone can rise to exorbitant values (the same down). It is not advisable to take these values as reference.

Mar 20 02:48 PM

[Fitz919:]

I think the problem has to do with the company creating new shares. This could be happening in bursts, and it may take a day or two to even things out. These are very complex securities that utilize credit default swaps...you would think that since they are run by computers they would do a better job of keeping the two sides balanced.

Mar 20 06:25 PM

[Briggsy:]

ETF share creation requires that you deposit a defined basket of underlying assets into the fund. Some or most of those assets might be too exotic or specialized for anyone to realistically get their hands on. And the value of such assets may be too volatile for anyone to know whether it's worth the trouble to turn them into ETF shares.

Mar 21 01:57 AM

[Northstar10000:]

sds/sso works well. someone earlier mentioned them. I trade them off each other about every 5-10 days. They correlate almost perfectly.
I think institutions use these in addition to the spy.

Mar 21 08:45 AM

[dumbo:]

Let me try to add something sensible here. Two factors that may affect the observation you made are:

1. Dividend distributions. Its that time of the quarter when a lot companies (yes, even the financials!) and ETFs are going ex-dividend. Disproportionate distribution by these 2 ETFs may affect their (inverse) correlation adversely over the short term. However, I do not know if this was a factor in this case.

2. What price are you comparing the current price to? The obvious answer is: the previous day's close. Well, I don't know how they get those "official" closing prices but many times I have noticed that they can differ significantly from the 4pm EST price. Specifically, in this case, on reviewing the i/day data, the 4pm prices were as follows: FAS = 5.75; FAZ = 30.60. When compared to these prices, the observed premarket anomaly is not that huge: for FAS, its 0.02, or 0.34% {realistically, a 2-tick difference is nothing and well within the fluctuation one may expect over a short time period}; for FAZ, its 0.23, or 0.75%. I have often noticed that many leveraged funds can go off track their respective indices or their counterparts (FAS <-> FAZ, for example) for a little while; for this pair (FAS-FAZ), if you look at their recent price performance (using the "official" closing prices - HaHa!), on any day they can be up to 2% off each other. I guess its par for the course for such highly leveraged funds.

Mar 21 01:39 PM

[yk00002:]

If you look at the Direxion website you will find that both were trading at a discount to NAV. This is just a readjustment of the discount.

Mar 21 01:49 PM

[Steve Ward:]

The equities market is saying the worst is over. the bond market is saying more bad news to come.
Thus the underlying reason for the these ETF's paradox.

Traders and investors are split along these lines as well.

Mar 21 03:09 PM

[mbbcat:]

The old maxim - Don't Think! - Trade What You See!

applies here - it does not matter whether the mkt prefers FAZ or SKF etc, long / short today - as long as one can be on the right side of the trade.

These are trading & hedging vehicles, NOT investments

btw there are often some very interesting option trades on these.

Mar 21 06:31 PM

[VSN:]

could anybody tel me what is the underlying in these triple leverage ETFs...

Mar 23 08:29 AM

[DonaldRay:]

Hell, I am like the author....I just DON"T know.

Mar 24 11:19 PM