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Triple-Leveraged ETFs
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About Triple-Leveraged ETFs |
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Triple Leveraged ETFs Overview and forecast
These are also known as Bull and Bear ETFs, and are designed to achieve a return of 300% of their indices. They're highly volatile, and extremely sensitive to market moves. A Bull ETF will work on a positive result, a Bear ETF on a negative. These are, naturally, active funds, and use a variety of means, including equity swaps, rebalancing, and derivatives.
Equity swaps
Rebalancing
Derivative (finance)
The Triple Leveraged ETFs, with their high performance targets, are also highly mobile, and highly traded. Unit prices vary enormously even over a 6 month period, and one of these ETFs, Direxion Daily Financial Bull 3X Shares (FAS), has moved from a high of $32.68 to $2.32 to $8.64 in its short existence over that period to May 2009.
So these ETFs aren't for the faint hearted, or for amateurs. The Triple Leveraged ETFs are generally based on futures contracts, which if anyone's been watching the futures market, explains a lot about their performance. It
would be facetious to describe them as speculative, but they get a lot of criticism for their risk factors.
That said, investors don't mind making high returns, and anyone trying to outdo the market by 300% isn't going to be too unpopular when they do. Nor do the Triple Leveraged ETFs play too vaguely with their holdings. FAS is a case in point, with holdings in a lot of blue chips. The strategy may be ambitious, but the practices look like they're based on industry major league assets.
Note: These ETFs are so complex, and so sensitive, that it's advisable to take a long hard look at what you want to do with your investments. There are two
basic schools of thought about the Triple Leveraged ETFs:
1. They're too complex, and there are safer and less nerve wracking things to invest with.
2. They're big movers, they trade well, and the returns aren't to be sneered at.
Both of those arguments, in fact, are pretty much on the money. They do both, and they're an acquired taste.
Short term (6 months)
These are great traders, even if the moves in prices would get anyone into a much more intense relationship with their spreadsheets. 6 months on the Triple
Leveraged ETFs is a lifetime in other funds, and the real certainty is movement and volatility. At their lower levels, the upside, unsurprisingly, looks a lot more attractive.
The only thing Triple Leveraged ETFs have in common with other ETFs, in terms of performance, is that they're called ETFs, and structured as ETFs. A more accurate description might be "market seismographs". The 6 month period, in this case, is also going to be a shakeout period, which will show some behavioral character. That will give investors a bit more to work with, in terms of credibility and trust in performance.
Medium term (2 years)
In fairness, the Triple Leveraged ETFs haven't been around very long. They aim high, and they've been working with a horrendous series of complexities, particularly in terms of derivatives. It's likely that they can improve
considerably, in a healthier market with less stress being built in to the investors' psyches.
This is not a market for mindless enthusiasms. Global markets have been turning even good solid investments into confetti, and the US market has a series of major issues to overcome before it hits a reliable bull market. The
Triple Leveraged ETFs are sailing in a hurricane, and their core activities are all high volume movers.
Long term (5 years)
The Triple Leveraged ETFs come in a variety of sizes, shapes, and flavors. If they're classed together, they work in different fields. ERY is in energy. FAS is in finance. They work on different indices, and they're both extremely tough markets, with built in volatility. In five years, they and the other Triple Leveraged ETFs will undergo a series of sector moves.
Index fluctuations can be described as "brutal". Index investment is never as simple as it looks, and market indices are subject to sudden issues on an almost daily basis. The Triple Leveraged ETFs are the latest product of the concept of index investment. When investing in indices was first started, it was considered to be a good way of achieving an investment spread. History has proven that the indices are as mobile as any stock, just a bit slower.
The diversity of the Triple Leveraged ETFs suggests that a spread of investment across their various sectors could produce a stronger aggregate, in the long term. Even the concept of "long term" has a different meaning with these ETFs. In the long term, they will evolve, and their capital and strategies will evolve. Money can be made, but investors need to be fully aware of the status of their investment over any period.
Qualifiers to projections
We've avoided any simple minded definitions of the Triple Leveraged ETFs because they're such diverse, highly advanced investment vehicles. A piece of string is so long, but in the case of Triple Leveraged ETFs we're talking about several pieces of string doing different things. They use a range of methods, and they operate on a current market basis.
They trade in millions, in both directions, with ease. As pure trading materials, they're popular, despite big moves. For those looking for conservative long term investments, the Triple Leveraged ETFs aren't what you want. The best approach to these ETFs is to research them and get hard information.
Hype means less than nothing in the investment market. Investors need to look at acceptable levels of risk. If you're not comfortable with definite high risk, look elsewhere. If you can take risks, it might be worth trying a pilot investment, reducing current risk, and seeing what levels of performance are actually achieved.
As the funds say: Read the prospectus carefully. To which we would add, check charges, fees, and any other costs or liabilities. Your margins need to be clear, and added levels of complexity in this form of investment is avoidable.
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Last Updated on: 2010-01-14 02:03:40 |
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