As is the case with so many things in life, leveraged cuts both ways and that is particularly true in financial markets.
Of course, financial markets leverage also means a conversation about leveraged exchange traded funds, an exciting but risky corner of the broader ETF universe.
These products are best suited for active, risk-tolerant traders, something that both ProShares and Direxion, the two largest issuers of leveraged of inverse and leveraged ETFs, do a good job of explaining to investors on their web sites.
As we noted earlier this week, although leveraged ETFs are not buy-and-hold instruments, it is hard to ignore the year-to-date returns offered by 2013’s 10 best leveraged ETFs. All of them have at least doubled. Some could be sitting on triples by the end of the year. [Top 10 Leveraged ETFs of 2013]
But as the following list of the 2013’s 10 worst leveraged ETFs shows, holding the wrong leveraged funds for extended time frames can be hazardous to a portfolio’s health. All performances are as of Dec. 4. Let’s get started with the…
Direxion Daily Financial Bear 3X Shares (NYSEArca: FAZ)
YTD loss: 60.6%
Comment: FAZ had its glory days during the financial crisis when it spent significant time with a four-digit price tag. This year, the ETF is experiencing dark days with financial services being one of the leading sectors. FAZ can still work as an occasional short-term trade, but this is not a long-term hold by any stretch.
ProShares UltraPro Short QQQ (NasdaqGS: SQQQ)
YTD loss: 60.9%
Comment: SQQQ would be atop this list if we were writing it in 2000 as the tech bubble was bursting. Alas, the ETF was not around back then. There has been talk of another tech/Internet equity bubble, but the Nasdaq’s current valuations are well below what was seen in late 1999. [The Changing Face of QQQ]
Direxion Daily Natural Gas Related Bear 3X Shares (NSYEArca: GASX)
YTD loss: 63.6%
Comment: There have certainly been times when the short natural gas trade has worked. This may not be one of them as the U.S. Natural Gas Fund (NYSEArca: UNG) jumped 4.3% on strong volume Thursday. GASX is a bearish equity play on the index tracked by the First Trust ISE-Revere Natural Gas Index Fund (NYSEArca: FCG). If that ETF breaks resistance at $20, GASX will experience more pain.
VelocityShares Daily 2x VIX Medium Term ETN (NasdaqGS: TVIZ)
YTD loss: 64.3%
Comment: TVIZ attempts to deliver twice the daily returns of the S&P 500 VIX Mid-Term Futures Index. As is the case with so many volatility ETNs this year, TVIZ has struggled because, well, the Federal Reserve has done everything it can to damp out volatility. TVIZ was reverse split earlier this year.
ProShares Ultra Silver (NYSEArca: AGQ)
YTD loss: 65.2%
Comment: Simply put, most precious metals ETFs have been punished this year and silver funds are no exception. As a double-leveraged play, AGQ’s woes have been compounded. If silver futures take out support around $18, things could get ugly for silver ETFs, leveraged and otherwise, in a hurry. [Silver Slayed: ETFs Backed by the Metal Look Vulnerable]
VelocityShares 3x Long Gold ETN (NYSEArca: UGLD)
YTD loss: 67.5%
Comment: As the returns indicate it has been nearly equally dangerous being double-leveraged long silver as it has been being triple-leveraged long gold via UGLD. Being long gold and silver with traditional ETFs has been dangerous this year, but leverage has increased the pain.
VelocityShares 3x Silver ETN (NYSEArca: USLV)
YTD loss: 83%
Comment: See AGQ. If silver futures could climb above $20 and then $22, AGQ and USLV could be a lot of fun. The question is when will that happen?
ProShares Ultra VIX Short-Term Futures (NYSEArca: UVXY)
YTD loss: 90.2%
Comment: Here is would help UVXY: A prolonged decline in U.S. equities. That much is obvious because The ETF is up 9% in the past five days and that has been a rough period for the S&P 500.
VelocityShares Daily 2x VIX Short Term ETN (NYSEArca: TVIX)
YTD loss: 90.2%
Comment: Last year, TVIX dropped about 50% in just a couple of trading sessions after its net indicative value surged because Credit Suisse had ceased issuing shares of the ETN. Such controversy has not plagued TVIX this year, but a lack of volatility has. TVIX was also reverse split earlier this year. With Thursday’s close just over $9, another reverse split is not out of the question.
Direxion Daily Gold Miners Bull 3X Shares (NYSEArca: NUGT)
YTD loss: 95.4%
Comment: As has already been noted, being long plain vanilla gold and silver ETFs has been bad enough this year. Adding three times the leverage to the already downtrodden miners is just asking trouble as NUGT affirms.
Still, investors have stood by NUGT. The ETF has seen 2013 inflows of $1.4 billion while its bearish cousin, the Direxion Daily Gold Miners Bear 3X Shares (NYSEArca: DUST) has lost cash. And that is with DUST being the best leveraged ETF year-to-date. [The Wild Ride of a Leveraged Gold ETF]
Speaking of reverse splits, NUGT has undergone two this year.