In a market where we have three products that have generally been doing very well — gold, silver and oil in this case –it’s very tempting to try to squeeze the most gain you can out of the investment dollar. If you are approved for margin at your brokers, then you can execute your own leverage by buying stocks, ETFs etc using money borrowed from your broker. If you are not careful doing this things can go wrong for you in a hurry, but that’s true any time you employ leverage. Another way to increase returns is to use leveraged ETFs. Leverage can be either 2X or 3X, regular, long or “Bull” OR inverse, short, “Bear”. The two major players in the leveraged ETF space are Direxion and ProShares.
There is one thing that while true of any investment is doubly true of leveraged ETFs: If you do not absolutely understand the product and how it works you have no business even thinking about investing in them. Direxion has some good, short, plain-language education on their site. I strongly suggest you read it. Let me give you some word bites:
“In essence, leveraged ETFs respond to gains by becoming more aggressive while they respond to losses by becoming more defensive. In markets which are directional this can be an advantage; in markets which lack direction, this can be a disadvantage.” TRANSLATION: Works well in a trending market, look out in volatility.
“Direxion’s leveraged ETFs seek daily goals, which means that the returns of the ETFs over time should not be expected to be a multiple of the cumulative return off the benchmark for the longer period.” TRANSLATION: Your return may be substantially less than 2x or 3x the underlying index if you hold the ETF for more than one day.
“These funds are not intended for use by conservative investors who: a) cannot tolerate substantial losses in short periods of time; b) are unfamiliar with the unique nature and performance characteristics of funds that seek leveraged daily investment results; and c) are long-term investors who do not monitor their portfolios frequently” TRANSLATION: Be honest with yourself about who you are.
I have to hand it to Direxion, in a frankness that is refreshing in the financial industry they make it quite clear that their ETFs aren’t for everyone. Right on their home page it says:
“Daily Investment Goals. Not Monthly Investment Goals. Not Annual Investment Goals. Direxion Shares ETFs seek daily investment goals and should be used strictly as short term trading vehicles”.
This is true of any leveraged ETF by the way, not just Direxion shares. This is why I become irritated when paid services like Vectorvest will blithely drop a leveraged ETF into an investment strategy (in this case AGQ, 2x silver in their Strategy of The Week for March 4th entitled “Hi Ho Silver”) without explaining both the pros and cons of the investment. In their case they put it into a nicely trending time period and of course, it showed a good return. (Had you followed their advice and purchased AGQ at the open on Monday right now you would be down $3.91/1.83% — because our silver market has been a bit volatile so far this week). This doesn’t mean that it won’t pan out to be good advice, but it certainly wasn’t fully informed. Continue reading