My recent long position in the Direxion 3X Financial Bull ETF (FAS) was one of my more successful trades of the year.
But it was stupid, and not because of the leverage. I knew it was a leveraged bet. That’s exactly what I wanted. But I also knew that I was going to keep the position for several days, and a 3x ETF is simply the wrong tool for a multiday position.
The 3X ETFs use “total return swaps” to create the leverage. These swaps are settled each day. If the index (in this case, the Russell 1000 Financial Index) goes up consistently, then there’s a good chance that the total return of the ETF will approximate 300% of the return on the index.
But the concept falls apart in choppier markets. In a market that trades up-and-down for a few weeks, and ends up say 10%, a triple-leveraged ETF won’t be up 30%. It might not be up at all.
Consider the results of the FAS and its counterpart, the Direxion 3X Financial Bear ETF (FAZ) over the past six months. Incredibly, both are down over 75%.
So next time I want to use a little leverage, I’ll use the right tool — either futures or options spreads. From now on, the 3X ETFs are strictly for intraday.
Disclosure: No position