Five ETFs Not for the Faint of Heart

Includes: AGQ, DRN, EDC, FAS, YINN
by: Michael Anderson

There are all types of investors: dividend, ETF, long-term, short-term, day traders, value, small cap, large cap, and international investors, plus many more. A variety of combinations of all of the different types of investment strategies can occur as well. Every investor’s goal is to make money and some are satisfied with less of a return to carry less risk. There is nothing wrong with anyone’s style, but approaches and strategies can be changed to gain better returns and even taking on more risk as a small portion of a portfolio. Many like to take on a lot of risk, trying to get the best possible return. What I am going to do is take a brief look at some of the Ultra – (2X) and the Direxion Bull-(3x) ETFs. As I try to continually state, doing research, realizing value, and using common sense can allow an individual to have a solid idea of the direction of a market and/or stock, but also determine risk-factor as well.

In 2009, investing in one of these ETFs, Direxion Daily Financial Bull 3X Shares (NYSEARCA:FAS), I was able to have a return of more than 300% because I decided to take a bigger risk and have FAS be more than 75% of my portfolio. These ETFs can be very effective when there has been a big run up, but especially on a big downturn and little downside, it helps alleviate the risk. An individual having FAS present in 10% of their total portfolio throughout 2009 at an average price of $7, and sold at an average of $32 up to 2011, all other investments being even, would have a return of 37.5% over 2 years. Again, with all other investments in that example portfolio returning 0%, the return would have been an average of almost 18% per year in each of those years.

Also, the low for FAS in 2009 was about $4.50, and the high in 2010 was $39, which shows that a return could have been even higher taking a conservative approach with the ETF in 10% of a portfolio. It could have been traded, it could have been a larger part of one’s portfolio, but it shows how a “risky” investment can pay off without having to actually carry a lot of risk. At that point, everything was so badly beaten, even as it went down, the future return was obvious to me.

Why I liked it better than just investing in C, BAC, JPM, or some of the other individual banks is because the ETF holds a variety of the banks, thus limiting, in my opinion, the downside risk in case a bank failed or something really bad happened. I thought it offered more upside too, instead of just owning a couple banks on their own.

Obviously, the market in 2009 was an opportunity of a lifetime, but high returns will continue in the stock market and these (2X) and (3X) ETFs are ways to try to make a little bit more by taking on more risk. Yes, a conservative investor could have invested in XLF, but I saw an easy return in the group of banks which had me take more risk, thus tripling the returns I would have made if I invested in XLF. Timing, investing as it goes down, and the future of the sector and overall market are the obvious keys, which are the keys to most investments. Below I will go over some of the others that are worth taking another look at. Also, I am more of an optimist in regards to the economic recovery and worldwide developments. So, I like the Bull/Long ETF for a longer hold, buying on declines and the Bear/Short ETF for short term trades, if at all.

1) FAS – Direxion Daily Financial Bull 3X Shares

This ETF includes stocks such as JP Morgan, Bank of America, and Wells Fargo (NYSE:WFC)

52 week range of $17.05 - $39.74
Represents a gain of 133% from the 52 week low to high.

As stated above, bank stocks have risen significantly and have given investors solid returns, but with an improving economy, it may be safer to be on the positive side of the banks than the negative. I also think it can be used for short term trades and as one rises 5%, the other is declining, and thus worth taking a look at.

Here is an article called "7 Reasons to Buy Bank Stocks".

Chart forDirexion Daily Financial Bull 3X Shares (<a href='' title='Direxion Daily Financial Bull 3x Shares ETF'>FAS</a>)

2) EDC - Direxion Daily Emerging Markets Bull 3X Shares

This ETF includes stocks such as China Mobile (NYSE:CHL) and Petrobras (NYSE:PBR).

52 week range of $18.03 - $41.81

Represents a gain of 132% from the 52 week low to high.

This is self explanatory and can be a better long term investment than many of the other 2X to 3X ETFs as emerging markets offer a lot of upside growth in those economies.

An article, "Emerging Markets: The Story for 2011".

Chart forDirexion Daily Emrg Mkts Bull 3X Shares (NYSEARCA:<a href='' title='Direxion Daily Emerging Markets Bull 3x Shares ETF'>EDC</a>)

3) DRN - Direxion Real Estate Bull 3X Shares

This ETF includes stocks such as Simon Property Group (NYSE:SPG), Vornado Realty Trust (NYSE:VNO), and Host Hotels and Resorts (NYSE:HST)

52 week range of $25.52 -$60.52
Represents a gain of 137% from 52 week low to high.

The real estate market was hit very hard and it is still recovering. It is still a buyer’s market including low interest rates that have recently come off of their all-time lows. So, due to the recovery and the current market, it can still offer good upside.

Here is an article about the positivity of the real estate and lending market in 2011.

Chart forDirexion Daily Real Estate Bull 3X Shrs (NYSEARCA:<a href='' title='Direxion Daily Real Estate Bull 3x Shares ETF'>DRN</a>)

4) CZM - Direxion Daily China Bull 3X Shares

This ETF includes stocks such as Baidu (NASDAQ:BIDU), International (NASDAQ:CTRP), and PetroChina (NYSE:PTR)

52 week range of $24.65 - $51.38

Represents a gain of 108% from 52 week low to high.

China has a population of several billion people and their growth is at about 10%, which equates to a lot of opportunity in China.

China GDP Growth Rate

Chart forDirexion Daily China Bull 3X Shares (CZM)

5) AGQProshares Ultra Silver (2X)

Holdings are based on silver bullion

52 week range of $41.55 - $161.45

Represents a gain of 288% from 52 week low to high.

Silver has had a massive run up and can have a correlation with the rise of gold, but holds more of an obvious risk. Both silver and gold have had a nice run over the years, but many investors like to have it as part of their portfolio as it generally provides a safer investment through poor economic times, or when cash is weakened. I am not one to predict the rise of gold and especially silver, but it is definitely worth a look with an opportunity for continued upside and positivity coming from many investors. Here is an article that states 5 reasons gold will continue to rise.

Here is an article on the optimism of both gold and silver, plus the correlation between the two.

Chart forProShares Ultra Silver (NYSEARCA:<a href='' title='ProShares Ultra Silver ETF'>AGQ</a>)

Those are 5 sectors and ETFs that I am positive on. I know it seems as if I downplayed the risk initially, but I find that there are many ways to use these tools to increase value and diversify a portfolio. They obviously hold much more risk than the standard ETFs, which offer both higher upside and even bigger downside. I am younger, at less than 30 years of age, so I can afford to take on more risk and have much more of it be a part of my portfolio, as I did in 2009. That year was unique as I would probably never have that type of allocation again, as diversification is important. It would almost be irrational for an individual older than 50 to have more than a very small percentage of these in their portfolio regardless of the confidence one may hold.

A couple of strategies that can be used with these ETFs: An individual can combine several to make it a small part of their portfolio (5% to 10%). For very high risk, invest in all 5 as part of a whole portfolio. Even higher risk, invest in one or two as part of the whole portfolio. There are so many ways to be able to add these to a portfolio, but any of the ways does take some risk and a lot of confidence. Many of the ETFs mentioned are still near their 52 week high. Looking at the charts it is easy to see the volatility, but on pullbacks, they may be worth some consideration as the upside is very high and may be worth the risk. But also remember that the downside risk is there as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.