Triple-Shot Leveraged ETFs on Their Way

Get ready for that triple shot whatever it is you order.

Direxion Funds, the kings of levered products, just filed for a bunch of triple long and triple shot short ETFs.

According to Index Universe the list is as follows:

1) MSCI Broad Market
2) Nasdaq 100
3) Dow Jones Industrial
4) S&P Midcap 400
5) Russell 2000
6) Nikkei 225
7) MSCI EAFE
8) MSCI Emerging Market
9) S&P BRIC 40
10) FTSE/Xinhua China 25
11) Indus India
12) S&P Latin America
13) MSCI Commodity Related Equity
14) Energy Select Sector
15) Financial Select Sector
16) DJ US Real Estate
17) S&P US Home Building Select

As with the double long and double short, these (assuming they actually list and do what they are supposed to) open the door to several different types of strategies ranging from speculative gambling to what is essentially portfolio rocket science.

As with the double products, the Direxion ETFs objective is on a daily basis, not over any longer period of time. For an understanding of how this can create surprises for people - over the last 12 months SPY is down 5% but over that same period the double long S&P 500 (SSO) is down 20%. For the calendar year 2007, SPY was up 3.5% and SSO was down 3.5%. That doesn't necessarily mean the product doesn't work, but somehow the combination of up and down days netted those two results.

I think the long products would give a better longer term result in a market that was trending up - as opposed to a market that has been rolling over - but that's just an opinion.

Chances are some folks will get very aggressive with these. I would probably only be interested in the triple short S&P 500 or maybe triple short EAFE as a hedge for when the market is below its 200 DMA. Some other folks will create some very sophisticated pairings of long/short, single/double/triple, different indexes and so on.

A portfolio using only broad-based products could have neutralized out the financials very efficiently with the triple short financials without disrupting too much of the rest of the portfolio. Unfortunately the rocket science applications of these products don't get written about very often but maybe between now and when these funds list I can dig something up.

While it should go without saying, I'll say it anyway: levered products used incorrectly offer the risk of an absolute blowup. A position on the wrong side of the trade on a day where the market moves 2% could result in an 8% loss. Check the math? No, the goal would be three times but occasionally it moves more or less than the objective and this sort of scenario on a given day is plausible.

For anyone looking at these as an efficient hedge, trust me, a little bit will go a long way.

• More on choosing the right ETF