Leverage has become a dirty word in the market. Over-leveraged hedge funds and banks have collapsed under the weight of their bad bets, and investors everywhere have learned to avoid any company that has the leverage taint. It's seems, then, that the timing couldn't be worse for an ETF company to release a new crop of leveraged ETFs, but Direxion pushed ahead with its November offerings eight of triple-leveraged long or short return ETFs.

What's surprising is the funds have turned out to be extremely popular so far. In this article we'll have a look at these funds to decide if the risks are worth the returns. (To learn how leveraged ETFs work, read Dissecting Leveraged ETF Returns and Leveraged Investment Showdown.)

Direxion's Triple Hitters
The eight new funds are:

  • Direxion Small Cap Bull 3x (NYSE:TNA) and Small Cap Bear 3x (NYSE:TZA)
  • Direxion Large Cap Bull 3x (NYSE:BGU) and Large Cap Bear 3x (NYSE:BGZ)
  • Direxion Energy Bull 3x (NYSE:ERX) and Energy Bear 3x (NYSE:ERY)
  • Direxion Financials Bull 3x (NYSE:FAS) and Financials Bear 3x (NYSE:FAZ)

The small-cap funds (TNA, TZA) track triple the return (or the inverse return) for the Russell 2000 Index of small-cap companies. The large cap funds (BGU, BGZ) track triple the return (or inverse return) for the Russell 1000 Index of large-cap companies. The energy (ERX, ERY) and financials (FAS, FAZ) ETFs are also triple-leveraged to the return (or inverse) of the Russell 1000 Energy Index and Russell 1000 Financial Services Index, respectively.

Risky Products
There are some risks to these instruments, and investors should know and understand them before rushing out to buy.

The main risk, of course, is that they are triple-levered, so if the index drops 15% in one year and everything works out the way it should, your bull ETF will drop 42.62%, according to the prospectus. The estimated return is based on the volatility of the underlying index, so it may vary. The prospectus has a chart that shows a wide variety of possible returns. If you own the Bear shares, and the index drops 50% over one year, your return could vary anywhere from 33% to 679%.

This tracking error is influenced by fund expenses, underlying index volatility, differences between securities held in the ETF compared to the index and bid-ask spreads, among other factors. (To read more about the relationship between leverage and volatility, see Price Volatility Vs. Leverage.)

Investors Lining Up
Since these ETFs began trading they have become quite popular with investors. The Large Cap Bull Shares traded more than 5 million shares on Tuesday, Nov. 18, and the Large Cap Bear Shares traded nearly 1.6 million shares. The price volatility on these instruments is astounding. In the past week, the Large Cap Bear Shares have soared from $86 to around $105 and sunk back to $70 before closing at $87.88 on Tuesday, Nov. 18.

The Financial Bull Shares closed over $43 a share on Thursday Nov. 13, and traded as low as $26.20 yesterday.

Bottom Line
The new triple-levered ETFs launched by Direxion last week offer great trading opportunities, but are not for the faint of heart due to the extreme price volatility.

Related Articles
  1. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  2. Investing Basics

    Top Tips for Diversifying with Exotic Currencies

    Is there an opportunity in exotic currencies right now, or are you safer sticking to the major ones?
  3. Mutual Funds & ETFs

    The 3 Biggest Mutual Fund Companies in the US

    Compare and contrast the rise of America's big three institutional asset managers: BlackRock Funds, The Vanguard Group and State Street Global Advisors.
  4. Investing Basics

    3 Alternative Investments the Ultra-Rich Usually Own

    Learn about the ultra rich and what normally comprises their net worth; understand the top three alternative investments usually owned by the ultra rich.
  5. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  6. Professionals

    5 Top-Rated Funds for Your Retirement Portfolio

    Mutual funds are a good choice for emotional investors. Here are five popular funds to consider.
  7. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  8. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  9. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  10. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  1. Who do hedge funds lend money to?

    Many traditional lenders and banks are failing to provide loans. In their absence, hedge funds have begun to fill the gap. ... Read Full Answer >>
  2. What licenses does a hedge fund manager need to have?

    A hedge fund manager does not necessarily need any specific license to operate a fund, but depending on the type of investments ... Read Full Answer >>
  3. What do hedge fund analysts do?

    A hedge fund analyst primarily provides support to a portfolio manager on how to best structure the hedge fund's investment ... Read Full Answer >>
  4. Can mutual funds invest in hedge funds?

    Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>
  5. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  6. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!