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. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Mining Sector

    Learn about the top three metals and mining exchange-traded funds (ETFs), and explore analyses of their characteristics and how investors can benefit from these ETFs.
  2. Chart Advisor

    Agriculture Commodities Are In The Bear's Sights

    Agriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
  3. Investing News

    Top Tips for Diversifying with Mutual Funds

    Are mutual funds becoming obsolete? If they have something to offer, which funds should you consider for diversification?
  4. Professionals

    Top Stocks to Short, Go Long On to Beat the Market

    A long/short portfolio can help weather a variety of market scenarios. Here's how to put one together.
  5. Mutual Funds & ETFs

    Top 4 Asia-Pacific ETFs

    Learn about four of the best-performing exchange-traded funds, or ETFs, that offer investors exposure to the Asia-Pacific region.
  6. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  7. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  8. Savings

    Become Your Own Financial Advisor

    If you have some financial know-how, you don’t have to hire someone to advise you on investments. This tutorial will help you set goals – and get started.
  9. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  10. Professionals

    Top 5 Highest Paid Hedge Fund Managers

    Understand what a hedge fund is and why hedge fund managers make so much money. Learn about the top 5 highest paid hedge fund managers.
  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!