Inverse funds and ETFs have made it easier than ever for investors to play the short end of the market. Even double and triple-leveraged funds have been around for a while, and recently Direxion has added another group to its ever growing stable as SeekingAlpha reports:
Direxion, the provider of revolutionary triple-leveraged exchange traded funds (ETFs), is out with a new set of funds. This time, they come with exposure to Treasuries.
These new funds allow investors to go three times long or short on 10-year and 30-year Treasury bonds, essentially making a bet on rates. The indexes give 300% the daily performance, or 300% the inverse, of the NYSE Current 10- and 30-year U.S. Treasury indexes.
The new funds are known as:
* Direxion Daily 10-Yr Treasury Bull 3x Shrs (TYD)
* Direxion Daily 30-Yr Treasury Bull 3x Shrs (TMF)
* Direxion Daily 10-Yr Treasury Bear 3x Shrs (TYO)
* Direxion Daily 30-Yr Treasury Bear 3x Shrs (TMV)
The current rate on a 10-year bond is 2.76%; on a 30-year, it’s 3.66%. Treasuries were mixed after Wednesday, and longer-term bonds saw their yields rise slightly, reports Nick Godt for MarketWatch. Signs of improvement in the economy, however slight, tend to decrease the appeal of U.S. government debt.
Adding to pressure on the debt is that foreigners sold another $97 billion in net U.S. assets in February, the second consecutive decline following a $146.9 billion drop in January.
Also, Direxion will be changing the name of all of its ETFs to include the word “daily,” to better reflect that these funds seek daily investment goals and should be used only as short-term trading vehicles. Leveraged ETFs have become more popular, and along with that has come attention. Leveraged and short ETF providers have done a great job of educating investors about these tools.
All of these leveraged instruments have the potential to turn an ordinary investor into a gambling fool. Caution is advised and, unless you know what you’re doing, you better stay away from these hot potatoes. Wild price swings in either direction can do a number on your psyche as well as on your portfolio value.
To me, these instruments are used best in combination with a hedge strategy. I am looking forward to these Treasury Bull and Bear ETFs to establish some volume and price pattern over the next few months, and I hope to find a use for these tools in combination with a hedged income generation appraoch.
Comments 5
Ulli,
Regarding buying 2 beta or greater short ETFs. There can be a lot of slippage making 2 beta or greater very risky as evidenced buy the following example. If one would have purchased symbols SH (1 beta) and SDS (2 beta) on 01-28-08, which would have been a nice time to go short and held until 04-21-09 the gains would have been as follows: SH gained 28.00% while the 2 beta SDS gained 31.70% not 56.00% which would have been double what the 1 beta SH did. If one would have been wrong on the timing one would lose very fast. Only SH (1 beta) for me on the short side.
T.M.
TM,
I’ve had similar experiences when testing the hedges.
Ulli…
To avoid disaster, I would suggest buying one-third as many shares of a 3X fund as you would buy of a 1X fund
Taxxcpa,
Yes, that would be the logical thing to do. My experience goes along with reader TM’s comment above, that slippage and subsequent underperformance can cause problems as he described.
Ulli…
Direxion’s move makes sense. They’ve played the bear side of the market, but now there’s a bull side to be played as well. Of course, you have to be careful with these double and triple indexed funds. It’s like a trip to Vegas, when you’re winning == they give you another drink and you keep playing, but the tables can turn on you vry quickly, as did the double and triple bear market Proshares. Still Direxion’s bullish market ETFs are a good tool to have in your arsenal.