Leveraged ETF | stockbee


Leveraged ETF

If two times leverage is good, is three times better?

That is apparently what Direxion Funds is banking on as it lists exchange-traded funds that provide 300% leverage to market indexes on both the long and short sides.

Though these new ETFs give investors more bang for their buck, they should end up being extremely volatile, with the potential to deliver both huge gains and losses in relatively short periods. Investment managers ProShares and Rydex Investments sponsor ETFs that provide 200% leverage to markets, but the Direxion products are the first to use 3-to-1 leverage.

The first batch of eight bullish and bearish funds from Boston-based Direxion offers "an unprecedented level of leverage in the ETF arena," the company said.

Four of them listed Wednesday on the New York Stock Exchange's NYSE Arca platform and the rest are scheduled to launch Thursday. The ETFs launched Wednesday have net annual operating expenses of 0.95% and Thursday's have 0.94%.

ETF were supposed to overcome the problem of equity selection, but it is now coming full circle as more and more ETF are being launched. A simple strategy has become complex. ETF were supposed to be simple solution to the problem of equity selection.

5 years ago you had like 100 ETF out of which those with sufficient trading volume were around 25. Today you have 700 ETF.

At the end of the day more choice produces same problem as in stocks. Once the universe of available ETF increases, you again need to use some vehicle selection strategy to narrow down the focus. What criteria one uses for vehicle selection becomes more critical. Obviously one of the ways to manage the growing universe of ETF's is by using relative strength.

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