A (Popular) ETF Down 97%?

By Matthew Hougan

I spent part of this morning sorting through the May fund flow numbers to see if any new patterns showed up in terms of where investors were putting their new money to work.

You can access the full report here. The data is from the National Stock Exchange.

There’s a lot of interesting information in the latest report, including a complete table showing assets and inflows by ETF provider. Of all the data points covered, however, one in particular caught my eye.

So far this year, the Direxion Financial Bear 3x ETF (NYSE: FAZ) has attracted the second-greatest inflow of any ETF on the market, at $4.6 billion. Only the SPDR Equity Gold (NYSE: GLD) has done better, pulling in $11.8 billion.

Despite the massive inflows, FAZ ended May with just $1.6 billion in assets. Such a gap suggests that investors in the fund have experienced terrible returns.

And they have. Since FAZ launched in November 2008, the security has lost 93% of its value, falling from $71.41 per share last November 6 all the way down to $4.83 per share on Wednesday.

The numbers look more extreme if you measure from the ETF’s peak-to-trough. Using end-of-day closing prices, FAZ rallied in the 10 days after its launch from $71.41 to $165.48 per share. The fund peaked intraday above $200 per share, according to Yahoo Finance. Using those measures, the fund is off either 97% or 98% from its high point.

Such a view makes the success of the fund in attracting assets all that more intriguing. Investors keep pouring money into the fund despite the massive losses.

Or, perhaps I should say, traders are flocking to FAZ. Despite having just $1.6 billion in assets at the end of May, $43 billion worth of FAZ shares traded hands in May. That’s $2.2 billion per day, meaning the fund turned over its entire portfolio every single trading day of the month.

What to draw from all this? The suggestion is that people are using this fund correctly, as a trading tool and not as a long-term investment. Let’s hope so. With the fund down 97%, a longer-term investment strategy just doesn’t seem to be working out.

As a trading tool, the fund is delivering on its promises, providing 3X the inverse daily return of the Russell 1000 Financial Index. But you wouldn’t want to own it for the long haul.

BTW: In case you’re wondering, FAZ’s mirror fund—the Direxion Financial Bear 3x ETF (NYSE: FAS)—is trading down 80% over the same time period.

If you’re wondering how a 3X bull and 3X bear ETF can both be down sharply over the same stretch, I encourage you to watch our recent webinar on how leveraged and short ETFs work.

Original post

Comments

[J. Crighton]

Of course the flip side to that is: it's currently only 3% of its high and therefore a likely candidate to "buy and hold".

2009 Jun 05 02:39 PM

[kkerr]

J. Crighton: It can still easily lose another 97% from where it is now. 3x Bears get crushed during bull markets and go down in horizontal markets. Here is a hypothetical bull and bear using 3x XLF from the bull market of 2003-2007:

www.quantumfading.com/...

2009 Jun 05 04:00 PM

[History Buff 24/7]

I've actually made money on FAZ, but I never held it for very long.

I will resist the temptation to say it is imploding faster than the US dollar .. oh wait, I just said it, didn't I? True, but trite.

The leveraged ETFs using derivitives to track indexes are long term probably not a good idea. I think even the ones like USO which are not as leveraged are still better suited to day trading than for holding onto.

2009 Jun 05 05:25 PM

[Bruce Vanderveen]

To use a cliche, I wouldn't go near these things with a 10 foot pole!

2009 Jun 05 08:34 PM

[Henry Buttal]

Is Direxion doing well with this ETF? Certainly they should be making good transactional money if nothing else.

I was always curious about the market support implications of originating and managing an ETF of this type. Anyone have any idea?

2009 Jun 06 10:28 AM

[bowman711]

FAZ could be viewed as akin to purchasing an insurance policy. You pay a few hundred or thousand dollars every year for your house insurance, and 'lose' your 'investment' every year. Likewise, with FAZ; If there is no crash in financial stocks, a small loss could be considered as insurance while the majority of your stocks are going up. But, if there is another crash, especially if it goes lower that the previous low (i.e. that if this current rally ends like its counterpart rally after the 1929 crash), it will certainly help to offset any losses that you suffer in the majority of your portfolio.

2009 Jun 06 12:08 PM

[searcher]

These are best used as hedging mechanisms for day(s) trading.

2009 Jun 06 01:23 PM