Triple Leverage ETFs Debut

Direxion’s triple leverage ETFs debuted this week:

  • Large Cap (Russell 1K) Bull 3X Shares (BGU)
  • Small Cap (Russell 2K) Bull 3X Shares (TNA)
  • Energy (Russell 1K Energy) Bull 3X Shares (ERX)
  • Financial (Russell 1K Financial Services) Bull 3X Shares (FAS)

  • Large Cap Bear 3X Shares (BGZ)
  • Small Cap Bear 3X Shares (TZA)
  • Energy Bear 3X Shares (ERY)
  • Financial Bear 3X Shares (FAZ)

Articles from several sources explain them, including:

  • Morningstar — predictably cautious: “For the average Jane and Joe, these funds have a very limited, if any, place in a portfolio.” (So, if you don’t use them a lot, you’ll know you’re just average.)

  • ETF Trends — states the obvious: “They’re meant to be used by people who are managing their portfolios very actively, by professional, sophisticated investors.” (What? You mean I shouldn’t just put my mother’s entire retirement account in one of these and wish her well?)

  • MarketWatch — offers a cliche: “Fasten your seatbelts…” (Good one, John! Let’s see, volatility, metaphors, rollercoasters and wild rides, seatbelts. Ta-da! I see how you got there, and why you’re worth every penny of that Dow Jones salary.)

  • Direxion itself — corporate spittle: “an unprecedented level of leverage in the ETF arena, something that today’s dynamic investors are demanding.” (If you weren’t demanding unprecedented levels of leverage, you just aren’t dynamic enough. Spice it up a little, will ya?)

Many people have asked if I’ll be switching from the double leverage ProShares in my strategies. I’m not sure yet. It seems that where double leveraged worked before then triple leverage should work better. If we think the market is oversold and due for a bounce, wouldn’t a 3X bounce be better than a 2X? Sure it would, but something about there being a limit keeps nagging my thoughts.

Where shall we stop this progression? By the above logic, a 5X bounce would be even better, a 10X really getting somewhere, and a 100X better than betting it all on black while the crowd roars.

The purveyors of leveraged index ETFs get around complicity in the undoing of family finances by saying that the leverage is intended to enable an investor to commit less of their capital to a position because of the leverage. If so, then what’s the point?

That reasoning has me taking what would have been a $60k investment in the Russell 2000 and making only a $20k investment in a 3X fund instead. Well, why bother? Maybe so I can put the $40k balance in something else — maybe a 100X U.S. auto industry ETF — to diversify. But, if I wanted to diversify the $60k, then I guess I didn’t really want to commit it all to the Russell 2000 which, by the way, is pretty well diversified considering there are 2,000 companies in it.

No, we all know that nobody is reducing their allocation to these ETFs proportionally to the leverage they offer. They are used as powerful positions to benefit from a belief in market direction. Bears have done fabulously well with the leveraged bear market ETFs. One day, we’ll look back at these times as a superb chance to have committed money to leveraged bull market ETFs.

If pinned down, I would say that use of 3X ETFs should happen only when the market is extremely overstretched one way or the other. They should be reserved for the strongest conviction, not slight probability.

The one-week bounce from extreme oversold conditions that happened from Oct. 28 to election day saw ProShares Ultra Russell 2000 (UWM) gain 45% from $18.03 to $26.20. In the last two days, it dropped 16% to $21.90.

Why anybody would want more action than that is beyond me, but now it’s available.

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