3X ETFS On Fire

Since 2x ETFs, which give investors twice the returns of the underlying index, weren't enough for profit-hungry traders, Direxion released 3x ETFs earlier this month that track the Russell 1,000, Russell 2,000, and Energy and Financial sectors.  These ETFs try their hardest to achieve 3 times the daily change (straight up and inverse) of the indices they track.  Below we highlight the eight 3x ETFs that have been released by Direxion so far.

 

Although they've been trading for less than a month, the 3x ETFs have already become very popular trading vehicles.  And with a market that is averaging a daily change of nearly 4%, these ETFs have already taken traders for a wild ride.  Below we highlight price and volume charts of the 3x long and inverse Russell 1,000 and Financial ETFs.  As shown, volume has picked up significantly in recent days for all of these 3x ETFs, reaching 10,000,000+ shares per day in some instances. 

But the percentage change in these ETFs is what is really crazy.  The inverse 3x Russell 1,000 ETF (BGZ) has already had a rally of 114% and a decline of 42% since trading began on November 5th!  The Financial ETFs have been even crazier.  The 3x long Financial ETF (FAS) declined 80% from its high on 11/10 to its low last Friday.  Since then, it's already up 127%!  The inverse one has been even crazier.  From 11/6 to its high last Friday, FAZ went from $60 to $200 (235%).  Since then, it has gone from $200 back down to $70 (-67%).

Many have argued that these ETFs are contributing to the volatility of the market due to their leverage.  While the huge swings in these things are tempting, the losses can pile up fast with just one bad trade.  For the last several months, we have learned how excess leverage has threatened the entire system.  After all of this, what kind of message does it send to start creating securities that allow anyone, regardless of their investment experience, to leverage up three times with the simple click of a mouse?  Before the introduction of these ETFs, the only way for an individual to increase leverage was through margin borrowing or option trading.  Both of these require the brokerage to clearly highlight the potential risks and the investor to acknowledge them.  Yet with these ETFs, some investors are potentially leveraging up without knowing the risks involved.

As the popularity of these ETFs grows, it's likely that their marketers will only roll out products with more and more leverage.  4x? 5x?  Where does it stop?  In time, this will only increase volatility and the potential problems for the holders of these ETFs, as well as the systemic risk to the market overall.

 

 

 

 

Comments

[Tom Chechatka]

In considering the matter of "systemic risk to the overall market" leveraged index funds seem scarcely a pimple in comparison to leverage being added to the U.S. Treasury. If you want to highlight "systemic risk," there is where you should be looking. It does not take a nutty conspiracy theorist to imagine how the bankruptcy of the U.S. Treasury would be devastating to the world as we know it. Nor does it take a thoughtless cynic to suppose an intentional attempt at bankrupting the U.S. Treasury is, indeed, being orchestrated...

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