There is an awful lot of hate out there for leveraged ETFs. Microcap Speculator identified the Direxion 3X ETFs as "Wealth Destroyers." Jim Cramer called the Ultrashort Financials ProShares (SKF) the "ETF of mass banking destruction."
But the fact is that leveraged ETFs are nothing but a financial tool, which like any other, can be used either responsibly or recklessly.
The best known and most-criticized leveraged ETFs are Direxion's Russell 1000 Financials Bullish 3X ETF (FAS) and Russell 1000 Financials Bearish 3X ETF (FAZ), which aim to return triple the daily return of the Russell 1000 Financials Index in either a positive or negative direction.
Investors who play with these are 100% aware that they are playing with fire and have nothing to complain about when they lose money with them.
I also don't get the complaint that leveraged ETFs don't always accurately track the underlying over time. That's clearly spelled out in the prospectus which nobody bothers to read:
The return of each Fund for periods longer than a single day, especially in periods of market volatility, may be completely uncorrelated to the return of the Fund’s benchmark for such longer period.
The Funds are intended to be used as short-term trading vehicles for investors managing their portfolios on a daily basis. The Funds are not intended to be used by, and are not appropriate for, investors who intend to hold positions.
I feel no sympathy for anyone losing money in an ETF that they didn't bother to educate themselves about. If they just took three seconds to go to Direxion's home page, they'd see this:
Some have called for banning these ETFs, but why bother? They don't hide the fact that they're the financial equivalent of crystal meth, and traders who abuse them are destined to go broke sooner or later.
Why get in the way? If they don't use leveraged ETF's, they'll just try stuff like 100X leveraged f/x trading or huge options positions.
I’ll end with this quote from Chris Rock. Just substitute ‘ETFs’ for the drugs:
People love to get high. You could get rid of all the illegal drugs in the world and it won't mean sh*t. People want to get high. You could get rid of all the crack, all the herb, all the blow, you know what would happen? People will just think of new ways of getting high. That's right, guys would go into their basements and become scientists. 'Like dude, check this out, check this out, you know, if you get a baby's bottle, and you fill it up with a little gasoline and dead lima beans, and you suck it, you'll be f*cked up!'
Disclosure: Not crazy enough to play with these ETFs.
