Leveraged ETFs - Danger Hidden in Plain Site
Leveraged exchange traded funds (“ETFs”) were first introduced in 2006, and 3x Leveraged ETFs – designed to achieve 3x the performance of the underlying index or benchmark that a particular ETF tracks – were first introduced in November 2008 in the midst of the global financial crisis.
Unlike traditional ETFs, such as SPDR S&P 500 ETF, 3x Leveraged ETFs are risky, short-term trading vehicles that are not meant to be held as long-term investments. Even prior to the current Coronavirus Crisis, many 3x Leveraged ETFs, routinely lose 20% or more in a single day. During this Coronavirus Crisis several Leveraged ETFs have already imploded losing all or a substantial amount of their value, particularly those focused on oil, gold or developing countries, such as Velocity Shares Daily 3x Inverse Crude (DWTIF), Direxion Brazil Bull (BRZU), Direxion Junior Gold Minors Index Bull 3x (JNUG), Direxion Energy Bull 3x (ERX), and ProShares Ultra Bloomberg Crude Oil (UCO), among others.
Importantly, almost all 3x Leveraged ETFs “reset” daily – meaning they are designed to achieve their stated objective of 3x return on a daily basis. Due to the effects of compounding and the costs associated with the daily re-set, the performance of 3x Leveraged ETFs quickly diverges from the performance of the underlying index or benchmark to the negative in a phenomenon known as “decay” or “levered fund decay.” This process is accelerated the more volatile the underlying index or benchmark are. Further, a well-known process called “contango” can wreak havoc on ETFs ability to short many commodities, hitting ETFs that deal in these commodities, in particular oil, very hard.
If you are an investor who has lost money or has concerns about investments made in 3x Leveraged ETFs, please contact Daren A. Luma (email@example.com) at Daren A. Luma, PLLC (www.lumalegal.com) or (914) 304-4051 today for a free, no commitment consultation.