Triple Leverage ETFs Maximize Market Directions
November 5th 2008 at 6:00am by Tom Lydon
If you need or want more leverage in your exchange traded funds (ETFs), today you’re going to have the choice.
Direxion has launched eight ETFs that are leveraged bull and bear funds designed to seek 300% of the daily performance, or 300% of the inverse of the daily performance, of the four indexes they track.
Among the reasons that Direxion went with triple leverage is that they’d be first on the market with a new and different product, instead of getting lost in a sea of similar products.
“ETFs that are first-movers tend to have an enormous advantage. We didn’t want to come out with products similar to what was already out there,” says Dan O’Neill, president and chief investment strategist. “We believe that that’s what’s going to distinguish them and that will hopefully be a point of attraction for clients. We’ve gone with high leverage because we think it’s attractive.”
When these funds first appeared in registration, there was a bit of chatter about whether triple leverage was a great idea for investors. After all, someone who isn’t careful or mindful of the risks could land themselves in hot water with the standard long and short funds, let alone one that offers triple leverage.
But O’Neill cautions against viewing these or any other leveraged fund in a vacuum.
“The question we have is how you’re going to use them. What matters is how you use them in a broader portfolio. If you use them to hedge, it may lower your risk profile,” he says.
The funds aren’t meant to be the centerpiece of any investors’ portfolio, but as part of an overall strategy. Putting all of your eggs in one basket is never a good idea.
“When someone hears ‘three beta,’ the assumption might be that someone would put 100% of their assets in that fund. They’re meant to be complementary or supplements. They can be used wisely.”
O’Neill says that most of the criticism has come from those who see ETFs as something where every fund needs to be suitable for every investor, but that simply isn’t the case.
“There are lots of investment tools used at the margins or only used by certain players. This is a suite of products that can be used very wisely by certain investors,” says O’Neill.
The early appearance is that professional investors will find these funds of particular interest, including hedge funds, registered investment advisors and proprietary trading desks on Wall Street, says Bill Franca, Direxion’s head of sales.
“I don’t think they’re going to be used by passive investors who are checking their portfolio once every six months. That’s not what these products are for,” Franca points out.
“They’re meant to be used by people who are managing their portfolios very actively, by professional, sophisticated investors,” O’Neill adds.
Overall, these funds are just another tool in the shed for investors who want more leverage. Franca says, “”We believe that leveraged ETFs have already proven their versatility in the marketplace. We feel that there’s definitely a place for leverage because of the ability of different firms to achieve leverage because of what’s going on in the market today.”
The new funds are:
- Direxion Large Cap Bull 3X Shares (BGU)
- Direxion Small Cap Bull 3x Shares (TNA)
- Direxion Energy Bull 3x Shares (ERX)
- Direxion Financial Bull 3x Shares (FAS)
- Direxion Large Cap Bear 3x Shares (BGZ)
- Direxion Small Cap Bear 3x Shares (TZA)
- Direxion Energy Bear 3x Shares (ERY)
- Direxion Financial Bear 3x Shares (FAZ)
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.