) have revolutionized the way investors approach thefinancial
No longer aremultiple accounts required to access the majority
of indexes, currencies and commodities. Now, with astock
brokerage account, the self-directed investor can trade nearly
every popular financial instrument with the click of a mouse.
Not only has access been democratized, butleverage has also
undergone a revolution. ETFs that provide two and even three
times leverage -- meaning they amplify the moves of an instrument
orindex by a given multiple, in either direction -- are available
on a variety of financial instruments.
I'll never forget my first time using triple-leveraged ETFs.
My technical research and fundamentals clearly indicated that the
S&P 500 index, the broad barometer of U.S.stocks , was
overextended on theupside . A big drop was on its way, and it was
going to happen soon.
Having just learned about the power of triple-leveraged ETFs
to capture such a move, I was excited to have recently discovered
Direxion Daily S&P 500Bear 3XETF (
I had a strong suspicion that stocks were going to dive
sometime before Wednesday. So when themarket opened Monday, I
purchased the Direxion 3X Bear ETF to capture the move. My
analysis was 100% correct.
As the market approached Monday's close, stocks started
spiraling downward. The market behaved similarly on Tuesday
withbearish news hitting the wire, causing the S&P 500 to
drop like a rock.
I was super excited, knowing that I was making triple the
points on the upside since my triple-leveraged ETF was inverse,
meaning it moved in the opposite way of the index. When I checked
the position on Wednesday, I was fully confident of at least a
triple in my account.
I couldn't believe my eyes.
My account was actually slightly lower than it was prior to
the big drop and my purchase of the Direxion 3X Bear ETF.
What happened? There must be some kind of mistake, I
Upon calling mybroker , it was explained to me that the
leveraged ETF was designed to track the daily movements of the
index and not to be held for more than a single trading session.
It was also noted that the triple-leveraged ETFs are rebalanced
Thisrebalancing and the associated fees can actually make the
ETF move in the opposite direction it is supposed to go. Had I
sold at the end of the session when the S&P 500 plunged, I
would have been profitable.
But since I held onto the ETF for several days, I lostmoney ,
even with the correct analysis on direction. That was a difficult
lesson to learn, so I started researching these volatile trading
Leveraged ETFs, launched in 2006, are ETFs that provide more
than 1-to-1 leverage to the underlying instrument or index. The
mistake I made was based on the fact that the leverage is two or
three times the daily movement of the underlying instrument or
index -- and not two or three times the longer-termgains or
In addition, ETFs sold as triple-leveraged are generally only
actually 2 1/2 times leveraged. In other words, for every point
the underlying index moves during the day, a leveraged ETF moves
2.5 times that amount.
Examples of popular double-leveraged ETFs include
ProShares' UltraShortDow 30 DXD ( NYSE: DXD)
UltraShort QQQ (
Ultra Gold (nYSE: UGL)
Ultra Euro (
Rydex's S&P500 (NYSE: RSU)
. Examples of triple-leveraged ETFs include
Direxion's S&P 500Bull (
Nasdaq 100 Bear (
Small Cap Bull (DXRLX)
Just how do these ETFs obtain leverage of this magnitude? In
an effort to avoid complex mathematics, simply stated, it is done
with a mixture of options, indexfutures and swaps to achieve the
Unfortunately, this financial witches' brew requires a daily
rebalancing to maintain the desired leverage. This rebalancing
results in extra management and interest costs, whichwill
adversely affect profits if the ETF is held overnight.
Risks to Consider:
Leveraged ETFs are powerful tools when used properly. Used
improperly, they can spell disaster for your portfolio. Holding
triple-leveraged ETFs overnight is just one dangerous aspect of
leveraged ETFs. The other involves investors lacking
money-management skills and biting off more than is prudent when
trading these instruments. Remember, leverage will cut you if you
are positioned opposite of the market's movement.
Action to Take -->
It's critical to remember that leveraged ETFs are tools strictly
for day trading. They can be vastly profitable if you are able to
correctly forecast market direction on a day-to-daybasis .
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