ajtj99's Market Pulse

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*****All Original 3x ETFs Are Down Over Last Six Months

Over on the Seeking Alpha site, there is a lively debate on my article on 3x ETFs. Many commenters note that Direxion says the funds are intended to track daily changes (on a leveraged basis) and may or may not track changes over a longer period of time.

Good point. But if it was just a tracking issue, then we would expect that some of the ETFs would outperform their targets, some would match the target, and some underperform.

That’s not what happened. Every single one of the original 3X ETFs — both bull and bear — is down big over the last six months. That’s not a function of a tracking error. It's a structural flaw in these instruments.

Volatility destroys the value of 3x ETFs over any prolonged period. So a passive investor using these ETFs to “allocate capital” is not just making a directional bet. He or she is making a bet that the underlying market will trend persistently, with little volatility. Good luck with that.

As some of the comments mention, these quirks may offer an edge for traders willing to take the opposite positions. For example, rather than buying a 3x bull ETF, a bull might short the 3x bear ETF (or enter a bullish position with puts or selling a call spread on the bear 3x ETF). I’m intrigued — have any of you been able to do this in size?

NOTE: Article shows charts !

http://seekingalpha.com/article/133156-all-original-3x-etfs-are-down-over-last-six-months?source=email