Discussing 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.
That is another way of bring up the familiar reminder that leveraged ETFs are not buy and hold instruments. That is the case in any given year and 2014 as been no exception.
As the following list of the 2014’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 Real Estate Bear 3x Shares (NYSEArca: DRV)
Year-to-date loss: 58.2%
Comment: With Treasury yields tumbling and investors remaining thirsty for yield, this has been an excellent year in which to be long real estate investment trusts (REITs) and REIT ETFs. That also means it has been a dreadful time to fight that trend.
DRV attempts to deliver three times the daily inverse returns of the MSCI REIT Index, the underlying benchmark for the Vanguard REIT ETF (NYSEArca: VNQ). VNQ, the largest REIT ETF, is up 26.3% and is also one of the year’s top asset-gathering ETFs.
VelocityShares 3x Long Natural Gas ETN (NYSEArca: UGAZ)
Year-to-date loss: 59.5%
Comment: As this list goes on, readers are bound to notice the dubious prominence of commodities and raw materials ETFs. UGAZ gets the theme going and it can be said if this list was revised in a few weeks, UGAZ’s loss could be worse. With oil and natural gas prices sliding, UGAZ’s losses are accelerating as the triple-leveraged fund is off more than 37% in just the past 90 days.
ProShares Ultra VIX Short-Term Futures (NYSEArca: UVXY)
Year-to-date loss: 59.5%
Comment: UVXY tries to reflect two times or 200% the daily performance of the S&P VIX Short-Term Futures Index. With some notable exceptions (late September and the first half of October come to mind), equity market volatility has been benign this year. That is bad news for long volatility products, particularly of the leveraged varietal.
Direxion Daily Semiconductors Bear 3x Shares (NYSEArca: SOXS)
Year-to-date loss: 63.3%
Comment: Like UVXY, there have been times when SOXS has worked this year. For example, the ETF gained 37% from Sept. 10 through Oct. 10. That run is a case study in why traders must be agile with leveraged ETFs because overarching trend with semiconductor stocks this year has been bullish, meaning marrying SOXS instead of dating has been hazardous to the health of one’s brokerage account. [A Surprising Leader Among Tech ETFs]
VelocityShares Daily 2X VIX Short-Term ETN (NYSEArca: TVIX)
Year-to-date loss: 60%
Comment: Like UVXY, TVIX has been done in by a lack of volatility. However, TVIX has surged 26% over the past month and that could be a situation worth monitoring.
Direxion Daily Junior Gold Miners Index Bear 3X Shares (NYSEArca: JDST)
Year-to-date loss: 71.7%
Comment: It might be a surprise to see a bearish gold miners ETF on this list, but here is JDST. JDST is the triple-leveraged answer to the Market Vectors Junior Gold Miners ETF (NYSEArca: GDXJ), an ETF that is down “just” 20.7% this year.
That says two things. First, JDST has been hindered by GDXJ’s two strong periods this year: The start of the year into early March and a five-week rebound early in the second quarter. Second, the erosive effects of daily compounding have taken a toll on JDST because shorting GDXJ has clearly been profitable.
VelocityShares 3x Long Crude ETN (NYSEArca: UWTI)
Year-to-date loss: 77.4%
Comment: UWTI’s place on this list can be easily summed up. The ETF is essentially a triple-leveraged proxy on West Texas Intermediate futures. On Thursday, that contract closed below $60 per barrel for the first time in over five years. Yet some investors have recently been putting new money to work with UWTI. [Oil ETF Traders Try to Time Market Bottom]
Direxion Daily Junior Gold Miners Index Bull 3x Shares (NYSEArca: JNUG)
Year-to-date loss: 81.7%
Comment: JNUG’s appearance on this list, to the naked eye at least, makes far more sense than JDST’s. Since JNUG is the triple-leveraged bullish answer to GDXJ, it is safe to say JNUG has done a poor job of reflecting triple GDXJ’s losses, JNUG has done a fine job of losing almost quadruple as much as its non-leveraged counterpart. So much so that JNUG will be reverse split 1-for-10 on Dec. 23. [Finally, a Reverse Split for JNUG]
Direxion Daily Russia Bull 3x Shares (NYSEArca: RUSL)
Year-to-date loss: 87.1%
Comment: Let’s make this simple. Russia is one of the world’s largest oil producers. It is also one of the worst-performing emerging markets this year. As such, RUSL will join JNUG in being reverse split on Dec. 23. RUSL’s reverse split will be 1-for-6.
Direxion Daily Natural Gas Related Bull 3X (NYSEArca: GASL)
Year-to-date loss: 89.4%
Comment: GASL is not a futures play. Rather, it attempts to deliver three times daily performance of the ISE Revere Natural Gas Index. That is the underlying index for the First Trust ISE-Revere Natural Gas Index Fund (NYSEArca: FCG), an ETF that has plunged 35.6% since Oct. 8 when we highlighted the ETF as being ready for a major move to the downside. [Out of Gas: Natty’s Plunge Plagues This ETF]