We first began to highlight the shortfalls of triple leveraged ETFs nearly three years ago, when we noted that they did a poor job tracking the indices they were meant to track. Since our first discussion then and in several updates since, triple leveraged ETFs continue to be among the worst ETFs on the market. These ETFs not only do a poor job tracking the indices they are meant to track, but they also have very high expenses, which further distort their ultimate performance versus their benchmark indices.
In the charts below, we highlight the performance of three times triple leveraged ETFs from Direxion, which are meant to track the performance of the Russell 1000 Financial and Technology sectors. So far this year, the Financial sector has declined 13.6% through Friday's close. Given the decline, you would expect the bullish ETF to be down (which it is) and the bearish ETF to be up. However, while the bullish ETF is down close to 50%, the bearish ETF is also down 14.2%, or 60 basis points more than the index itself! So even though the index is down, the ETF meant to provide three times the inverse return of the index is also down. To add insult to injury, it is also down more than the index itself!
For the Technology sector, we found a similar story. So far this year, the Russell 1000 Technology sector is up 3%. In terms of the ETFs, however, both are down. The ETF meant to provide three times the inverse return of the index is down 34.3%, which is actually more than 11 times the inverse return of the index. The bullish ETF is also down 6.1%. So even though the ETF is marketed as being triple leveraged, a more accurate description based on its return would be inverse double leveraged.
Defenders of these triple leveraged ETFs and the providers themselves usually argue that the ETFs aren't meant to track the long-term performance of the index, but instead the daily movement. But if they're not meant to be held for more than a few hours, what is the point anyway?
(Click chart to expand)