How the Gold Miners Bull 2X (NUGT) ETF Works

Direxion Daily Gold Miners Index Bull 2X Shares (NUGT) is a leveraged exchange traded fund (ETF) that should be used only for short-term trades. In fact, Direxion on its website notes the returns the ETF seeks on its benchmark (the NYSE Arca Gold Miners Index) are for a single day. Direxion also states the ETF should be used only by "investors who understand leverage risk and who actively manage their investments."

Trading Risks and NUGT

NUGT comes with a relatively hefty 1.14% expense ratio, as of Dec. 24, 2021. That’s not the only concern. The fund attempts to track 200% of the performance of the NYSE Arca Gold Miners Index via futures contracts, short positions, reverse purchase agreements, options, swap agreements and similar exotic trading tactics. This equals high risk.

In fact, up until March 31, 2020, fund managers at Direxion sought daily leveraged investment results, before fees and expenses, of 300% of the NYSE Arca Gold Miners Index performance. Because of increased market volatility, Direxion reduced the daily leverage exposure from triple to double. To reflect this shift, the fund changed its name from "Direxion Daily Gold Miners Index Bull 3X Shares" to "Direxion Daily Gold Miners Index Bull 2X Shares."

Deciding Whether to Trade NUGT

Because of the high risk, it’s likely that you’re looking to trade NUGT, not invest. In that case, it’s possible to see substantial returns in a very short time period. The key is to ensure you’re on the right side of the trend, which makes trading easier due to higher odds of appreciation, which leads to the ability to lock in gains.

In deciding whether to trade NUGT, one would need to determine in which direction they believe the NYSE Arca Gold Miners Index will move based on their research of the gold market. In addition, it's important to assess the top holdings of the ETF and determine where those positions are likely to move as well. For example, NUGT's largest holding, at roughly 4% of the portfolio, is the VanEck Vectors Gold Miners ETF (GDX).

Though 4% is small, this gives a slight idea into what the performance of the ETF might be. It is worth analyzing the VanEck Vectors Gold Miners ETF as well: its largest investments are in some of the biggest gold mining companies globally, such as Newmont (NEM) and Barrick Gold (ABX.TO).

Understanding how those companies are performing will provide additional insight. But it is important to stress that a leveraged ETF is meant for short-term gain and operates on a speculative nature by investing in riskier products, such as debt and derivatives, to amplify returns.

NUGT Key Metrics

NUGT seeks daily investment results, before fees and expenses, of 200% of the performance of its benchmark, the NYSE Arca Gold Miners Index. There is no guarantee the fund will meet these stated investment objectives and the fund should not be expected to provide two times the benchmark's cumulative return for periods greater than a day.

Key metrics for NUGT (as of Dec. 24, 2021) include:

• 1-year daily total return: -23.75% (as of Nov. 30, 2021)
• Inception date: Dec. 8, 2010
• Expense ratio: 1.14%

The Bottom Line

The Direxion Daily Gold Miners Index Bull 2X Shares (NUGT) can be an attractive trade in the short term for investors that are aware of the risk and time frame of trading a leveraged ETF, as well as understanding the gold market. However, it is important to understand the increased risks of investing in a leveraged fund that can amplify returns but also amplify losses.