With 2012 drawing to a close in a matter of hours, it is fair to
say it has been another wild, volatile and perhaps disappointing
year for leveraged
Wild and volatile because, and this is no surprise, some of the
best-performing ETFs on a percentage basis this year are leveraged
Disappointing because many leveraged funds continue to confound
investors that hold these products for extended time frames. For
example, the iShares Dow Jones U.S. Financial Sector Index Fund
), not a leveraged ETF, is up 22.6 percent this year. Presumably,
that means the ProShares UltraShort Financials (NYSE:
), the double-leveraged inverse equivalent of IYF, is down 45.2
Wrong. SKF is off "just" 42 percent, which may be a slight
disappointment for those that had fortitude to short that product
in January and ride that short all year. To be sure, that strategy
should not be employed by all investors. However, use of leveraged
ETFs as short-term trades , not long-term investments, will
continue to work in 2013. Here are 10 such funds to consider in the
Direxion Daily Gold Miners Bear 3X Shares (NYSE:
) This list is no particular order, but if it was in order of
preference, DUST might just appear in the top spot. The reason
being is that gold mining stocks and ETFs
continue to struggle relative to bullion
. Making matters worse is the fact this is becoming a long-running
DUST proves the aforementioned point about the importance of not
making leveraged ETFs investments. In 2012, the Market Vectors Gold
Miners ETF (NYSE:
) has lost 11.6 percent, but DUST is far worse with a loss of 21.3
percent. Do things the right way and view DUST as a short-term
trade and one will see this ETF has surged eight percent in the
past month while GDX has tumbled 9.6 percent.
Bullish alternative: Direxion Daily Gold Miners Bull 3X Shares
Direxion Daily Financial Bull 3X Shares (NYSE:
) The infamous FAS has surged 78.2 percent this year. An impressive
run to be sure, but investors could have done a lot better by
simply buying shares of Bank of America (NYSE:
) in January and holding that stake the entire year. Dow component
BofA has more than doubled this year.
Well, that is hindsight and investors are now wondering if FAS
can offer a sequel to its 2012 heroics in 2013. It is possible.
Financials are slightly cheaper than the broader market as the
Financial Services Select SPDR (NYSE:
) has a P/E ratio below that of
the SPDR S&P 500 (NYSE:
A catalyst(s) for FAS could arrive in the first half of 2013 if
regulators allow BofA and Citigroup (NYSE:
) to boost dividends and engage in much needed share repurchase
Bearish alternative: Direxion Daily Financial Bear 3X Shares
ProShares UltraShort Oil & Gas (NYSE:
) Here is another example of the dangers of holding a leveraged ETF
over the course of a year. The index DUG is designed to deliver two
times the daily inverse performance of the same index tracked by
the iShares Dow Jones U.S. Energy Sector Index Fund (NYSE:
). That ETF is up about 0.7 percent this year, but DUG has lost
almost 15 percent. As is the case with DUST, there have been
stretches of time where DUG has proven to be one of the better
energy ETFs, though it is important to note those stretches do not
last 10 or 12 months.
Amid faltering production, integrated oil names could be in for
another mediocre year in 2013, implying DUG is worth keeping an eye
Bullish alternative: ProShares Ultra Oil & Gas (NYSE:
Direxion Daily Technology 3X Bear Shares (
) It is not hyperbole to say tons of market participants are
concerned about Apple (NASDAQ:
). The largest U.S. company by market value traded over $700 in
October, but appears destined to close the year below $530.
Apple accounts for 17.2 percent of the Technology Select Sector
), the ETF that tracks the same index TECS is designed to deliver
three times the daily inverse performance of. When properly
applied, TECS is useful either for those looking to profit from an
Apple decline without having to incur the risks of shorting the
stock directly, or the limitations of the options market.
Additionally, since TECS trades for less than $10, those that are
long Apple or XLK, can use TECS as an occasional hedge.
Bullish alternative: Direxion Daily Technology 3X Bull Shares (
ProShares UltraShort Yen (NYSE:
) Of all the ETFs mentioned on this list, YCS may come with the
most simple, obvious reasoning. The yen will close 2012 as the
worst-performing developed market currency. Newly elected Japanese
Prime Minister Shinzo Abe
has pledged to pressure the Bank of Japan
to engage in unlimited monetary easing and target two percent
At this juncture, it appears BoJ will acquiesce to Abe's
demands. It is either that or risk losing its independence.
Bullish alternative: ProShares Ultra Yen (NYSE:
Direxion Daily Small Cap Bull 3X Shares (NYSE:
) Small-caps have held up quite well in an environment made
challenging by politicians' inability to solve the fiscal cliff.
The iShares Russell 2000 Index Fund (NYSE:
) has gained 1.7 percent in the past month compared to a loss 0.8
percent for the SPDR S&P 500 (NYSE:
That could be a promising sign regarding the chances of a
January Effect, the scenario under which small-caps leader a
broader market rally to start the new year. If small-caps do become
a leadership group in the first quarter, then the Direxion Daily
Small Cap Bull 3X Shares becomes useful as a short-term trade.
Bearish alternative: Direxion Daily Small Cap Bear 3X Shares
ProShares Ultra FTSE China 25 (NYSE:
)To its credit, the ProShares Ultra FTSE China 25 has not deviated
too far from double the returns of its unleveraged equivalent, that
being the iShares FTSE China 25 Index Fund (NYSE:
). Year-to-date, over the past six months, 90 days and 30 days, XPP
has offered just over double the returns of FXI.
That should not change the fact that leveraged ETFs are not
intended to be held all year. However, with Chinese equities and
plain vanilla China ETFs closing 2012 in strong fashion, XPP merits
consideration for the year ahead.
Investors should note that XPP sharply outperformed the Direxion
Daily China Bull 3X ETF (NYSE:
) in 2012. The two track different indexes and that likely explains
the difference. Both funds are highly risky, but if one can grab
better returns with a double-leveraged ETF over a similar
triple-leveraged product, that is a deal that should be taken.
Bearish alternative: ProShares UltraShort FTSE China 25 (NYSE:
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