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hall9999 (99.60)

Direxion 3X ETF's. Where did the money go?

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April 02, 2009 – Comments (7) | RELATED TICKERS: TNA , BGU

  I can understand a small difference in performance but can someone explain to me why the performance of these funds are so out of whack with their stated goals?

 

  I made an outperform call on TNA and BGU in November figuring long-term the market has got to go higher than where it was at that point.  Right now the market is about where it was in November.  

TNA is supposed to perform 3X the Russell 2000 index and BGU is supposed to perform 3X the Russell 1000 index both of which are down about 1% from the time I made my picks.  3 times 1% is 3% right?

So why are my picks down 38% and 25% respectively?  It can't all be management fees and transaction fees.  Are investors wary of buying these ETF's because they expect the market to go back down again?  If so, does that mean that these ETF's will surge past their index and be overpriced during a bull market?

7 Comments – Post Your Own

#1) On April 02, 2009 at 4:55 PM, briyan (25.92) wrote:

First of all, I believe the stated goal of these funds is to return 3X the tracked index on a daily basis -- they can't really do any kind of clean multiple over a long period. The 3X leverage creates decay, which is even more pronounced in highly volatile markets.

Here is a simple way you can picture the decay ... let's consider an imaginary index IDX and a 3X fund called TRX, both start at $100.

IDX - the index

Day 1:  110.00 (+10%)

Day 2:  99.00 (-10%)

Day 3:  108.90 (+10%) 

Day 4: 98.01 (-10%) 

 

TRX - 3X the index

Day 1: 130.00 (+30%)

Day 2: 91.00 (-30%)

Day 3: 118.30 (+30%)

Day 4: 82.81 (-30%) 

 

You can see as the index swings back and forth, the 3X index will tend to shrink faster.  The extra leverage can work well for you if most days go in the "right" direction, but when you move back and forth they sorta eat away at themselves.

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#2) On April 02, 2009 at 5:01 PM, bigpeach (92.27) wrote:

Hall, you should absolutely not be using leveraged ETFs unless you have a clear understanding of how they work and what they should be used for. briyan's got it right, a simple search will yield lots of articles on this topic. TheStreet.com has written some good ones explaining the problems with these. You really shouldn't hold these for more than a few of their compouding periods, which for most is a day.

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#3) On April 02, 2009 at 5:04 PM, anchak (99.74) wrote:

Hall...Please read this....

 

Hope it helped

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#4) On April 02, 2009 at 5:29 PM, KeepYourCoolFool (99.61) wrote:

So you are the guy always on the other side of my "obvious" calls.  Look up the term "decay"...

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#5) On April 02, 2009 at 5:38 PM, swank9 (< 20) wrote:

i'd like to point out that TNA is a really awesome ticker.

 

that is all...

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#6) On April 02, 2009 at 6:23 PM, AnomaLee (29.92) wrote:

It's the pounding part of the word compounding that is doing this to you. Leveraged ETF's aren't suited for anything but short term trades and are marketed for traders who are unable or unwilling to use leverage themselves.

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#7) On April 02, 2009 at 9:37 PM, hall9999 (99.60) wrote:

  Thanks for the comments guys.  I finally get it.

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