Leveraged ETFs are among the more exotic options for traders right now, and it looks like they're proving more popular at a time when market volatility continues to rage. From the WSJ:
The funds "have gotten extremely fast pick-up in terms of trading and people talking about them," says Soren MacBeth, who runs the Web site StockTwits.com, which collects Twitter posts about investing.
Mr. MacBeth says after just a few weeks the Direxion funds have regularly cropped up among the 10 most discussed stocks on his Web site on any given day.
Exchange-traded funds resemble open-end mutual funds but trade on an exchange like a stock. Direxion's largest ETF, Large Cap Bull 3X Shares, which aims to offer investors a return equal to three times each day's percentage-point change in the Russell 1000 stock index, has $237 million in assets and average daily trading volume of 8.2 million shares, according to fund researcher Morningstar Inc.
I touched on leveraged funds in U.S. News' ETF investing guide, and took a look at the leverage question in ETF Investing: 5 Pitfalls to Avoid:
Leverage can be deceptive. Leveraged ETFs, designed to double or triple market moves (for example, if the Dow jumps 5 percent in a day, a two-times leverage fund would return 10 percent), have one big flaw: They're meant to track only a single day's trade, making them unsuitable for buy-and-hold investors. Mariana Bush, an analyst at Wachovia, recently tested various scenarios for three-times leverage funds and found returns over a set period could be gains or losses of more than 15 percent depending on daily volatility—even when the index tracked by the security returned 5 percent between the buy and sell date.
Basically, if you aren't day trading, these vehicles probably aren't for you. Still, if you're looking for a short-term thrill leveraged ETFs appear to some appeal among a surprising number of investors.
Reader Comments