ETF Bull and Bear Discussion Board

[JohnCM]

Bear Market Turns Leveraged Gold Miners ETF To DUST

Mar. 27, 2020
About: Direxion Daily Gold Miners Index Bear 3x Shares ETF (DUST), Includes: JNUG, MRRL, NUGT

Seeking Alpha
Dave Dierking, CFA

Leveraged gold-related ETFs are experiencing several structural issues that are forcing both strategy changes and closures.

DUST, along with NUGT and JNUG, will be reducing leverage from 3X to 2X starting in May.

High costs in the derivatives markets and significant premiums/discounts to NAV make DUST excessively risky right now.

It turns out that even leveraged ETF providers have their limits!

Direxion, the ETF provider famous for offering dozens of highly leveraged funds to retail investors, is knee-deep in the downside that comes with using derivatives to swing for the fences. Triple-leveraged funds are risky in normal market conditions, but add in a liquidity crisis and a VIX that's hitting extreme levels and bad things are bound to happen.

Background

The writing was on the wall for leveraged products when UBS announced that the UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN Series B (MRRL), the popular ETN that often came with a 20% yield, was being forced to liquidate due to massive losses in REITs that triggered an early redemption clause.

But that was just the tip of the iceberg. Over the past couple of weeks, nearly 30 leveraged or inverse ETNs and ETFs have closed up shop (or will be closing shortly).

Leveraged ETFs & ETNs That Have Closed Since March 9
Ticker ETF/ETN Type of Closure Reason for closure Settlement Effective Date (On or Around)

DLBS iPath US Treasury Long Bond Bear ETN Delisting Indicative value declined below minimum listing standard on Mar. 6 n/a

DTYS iPath US Treasury 10-year Bear ETN Delisting Indicative value declined below minimum listing standard on Mar. 6 n/a

AMJL Credit Suisse X-Links Monthly Pay 2xLeveraged Alerian MLP Index ETN Mandatory Redemption Indicative value fell below $5 on Mar. 9 March 19

MLPQ ETRACS 2x Monthly Leveraged Alerian MLP Infrastructure Index ETN Series B Mandatory Redemption Indicative value fell below $5 on Mar. 9 March 19

HOML ETRACS Monthly Reset 2x Leveraged ISE Exclusively Homebuilders ETN Mandatory Redemption Indicative value fell below 60% from previous monthly valuation on Mar. 12 March 23

SMHD ETRACS Monthly Pay 2x Leveraged US Small Cap High Dividend ETN Mandatory Redemption Indicative value fell below $5 on Mar. 12 March 23

MLPZ ETRACS 2xMonthly Leveraged S&P MLP Index ETN Series B Mandatory Redemption Indicative value fell below $5 on Mar. 12 March 24

HDLV ETRACS Monthly Pay 2x Leveraged U.S. High Dividend Low Volatility ETN Mandatory Redemption Indicative value fell below $5 on Mar. 16 March 25

LMLP ETRACS Monthly Pay 2x Leveraged Wells Fargo MLP Ex-Energy ETN Mandatory Redemption Indicative value fell below 60% from previous monthly valuation on Mar. 16 March 25

MORL ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN Mandatory Redemption Indicative value fell below $5 on Mar. 16 March 25

MRRL ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN Series B Mandatory Redemption Indicative value fell below $5 on Mar. 16 March 25

DVHL ETRACS Monthly Pay 2x Leveraged Diversified High Income ETN Mandatory Redemption Indicative value fell below 60% from previous monthly valuation on Mar. 17 March 26

WTID ETRACS ProShares Daily 3x Inverse Crude ETN linked to the Bloomberg WTI Crude Oil Subindex ER Elective Redemption Stop-Loss Acceleration March 26

CEFL ETRACS Monthly Pay 2x Leveraged Closed-End Fund ETN Mandatory Redemption Indicative value fell below $5 on Mar. 18 March 27

CEFZ ETRACS Monthly Pay 2x Leveraged Closed-End Fund ETN Series B Mandatory Redemption Indicative value fell below $5 on Mar. 18 March 27

LRET ETRACS Monthly Pay 2x Leveraged MSCI US REIT INDEX ETN Mandatory Redemption Indicative value fell below 60% from previous monthly valuation on Mar. 18 March 27

BDCL ETRACS 2x Leveraged Long Wells Fargo Business Development Company Index ETN Mandatory Redemption Indicative value fell below $5 on Mar. 16 April 2

LBDC ETRACS 2x Leveraged Long Wells Fargo Business Development Company ETN Series B Mandatory Redemption Indicative value fell below $5 on Mar. 16 April 2

FINU ProShares UltraPro Financial Select Sector Fund Closure Unspecified Reason April 3

FINZ ProShares UltraPro Short Financial Select Sector Fund Closure Unspecified Reason April 3

OILD ProShares UltraPro 3x Short Crude Oil ETF Fund Closure Unspecified Reason April 3

OILU ProShares UltraPro 3x Crude Oil ETF Fund Closure Unspecified Reason April 3

UBIO ProShares UltraPro Nasdaq Biotechnology Fund Closure Unspecified Reason April 3

ZBIO ProShares UltraPro Short Nasdaq Biotechnology Fund Closure Unspecified Reason April 3

UWT VelocityShares 3x Long Crude Oil ETN Elective Redemption Elective acceleration April 3

DWT VelocityShares 3x Inverse Crude Oil ETN Elective Redemption Elective acceleration April 3

EVIX VelocityShares 1X Long VSTOXX Futures ETN Elective Redemption Unspecified Reason April 6

EXIV VelocityShares 1X Daily Inverse VSTOXX Futures ETN Elective Redemption Unspecified Reason April 6

WTIU ETRACS ProShares Daily 3X Long Crude ETN linked to Bloomberg WTI Crude Oil Subindex ER Elective Redemption Unspecified Reason April 6

Sources: FactSet, issuer press releases, prospectuses; data as of March 23, 2020; ETF.com

The ones that are labeled "unspecified reason" were mostly products with low assets to begin with that likely didn't have a viable path forward. Almost all of the others are being liquidated due to huge losses experienced over the past couple weeks.

One ETF that's getting a revamp - both in name and strategy - is the Direxion Daily Gold Miners Bear 3X ETF (DUST). It, along with several other bull/bear leveraged products, are actually reducing the exposure to their specified industries. Among the notable names are the Direxion Daily Junior Gold Miners Index Bull 3X ETF (JNUG) and the Direxion Daily Gold Miners Bull 3X ETF (NUGT).

Instead of using a triple-leverage strategy, DUST will reduce their exposure to just two times the underlying index and be renamed the Direxion Daily Gold Miners Bear 2X ETF.