Over the years, traders and investors have heard a lot about leveraged exchange traded funds, most of it bad. There has been much commentary regarding the disadvantages of daily rebalancing that often lead to significant deviations between a leveraged ETF and the index it attempts to track.
Likewise, there have been ample warnings, plenty coming from the issuers of leveraged ETFs, that these products are not suitable buy-and-hold products. Swift upside downside moves remind (and tempt) investors that are times when leveraged exchange traded funds post almost outlandish returns as some of these funds have done in recent weeks.
Even with those tantalizing short-term returns any examination of leveraged ETFs must be accompanied by the reminder that 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. [These Leveraged ETFs are Working]
Thanks in large part to traders’ savage repudiation of long oil positions, plenty of leveraged ETFs have recently been working, but some investors are hardly noticing. Just look at the VelocityShares Daily 3x Inverse Crude ETN (NYSEArca: DWTI).
DWTI has raked in less than $5 million in new assets this month, hardly befitting of a security that is up more than 69% over the past month. The song is the same with other bearish, leveraged oil ETPs. The ProShares UltraShort Bloomberg Crude Oil (NYSEArca: SCO) and the PowerShares DB Crude Oil Double Short ETN (NYSEArca: DTO) are the second- and third-best leveraged ETPs over the past month behind DWTI, but SCO has lost $29.5 million in assets while DTO is lighter by $17.1 million this month. That is the appreciation being shown SCO and DTO despite posting an average one-month gain of over 39%. [Wrong Moves With Oil ETFs]
A similar scenario has been seen with inverse ETFs that are bearish plays on energy equities. Since the start of November, the UltraShort Oil & Gas ProShares (NYSEArca: DUG) has surged nearly 15% while the Direxion Daily Energy Bear 3X Shares (NYSEArca: ERY) is higher by nearly 21%. As of Nov. 27, DUG had lost more than $6 million in assets this month while ERY had seen only modest inflows.