Leveraged ETF Traders Need to Know This

Click on Chart to Enlarge

First off, a reader had asked why, in practice, I don't typically immediately enter the opposing ETF when exiting a blog trade. So if I am in SDS, why not immediately enter SSO when exiting SDS? I think the idea is that you want to trade as much as you profitably can. While I have in some form or another addressed this issue in the past, if you are a consistent follower of this blog, especially if you participate in blog trades, then please read the comment section from the previous post to get some dialogue on this idea. I have decided not to make a separate post, because the basic info is already in the comment section.

Now for today I wanted to discuss some things about the Direxion 3x ETFs BGU and BGZ. I occasionally recommend these for trades on the blog in anticipation of catching a major directional market movement. However, holding these funds for the long term is a losing proposition.......if you are long. So you must be careful about holding these funds if they go against your position. They are great for day trading and for capturing leveraged moves on short market swings, but don't plan to hold these funds. And here's why....The funds are decaying over time.

The chart above is a chart of BGU, the 3x bullish fund, in candlesticks, and the S&P as a line graph for comparison. Do you see that the BGU has lost about 33% of its value since inception? Despite the S&P only being down about 2%.

Click on Chart to Enlarge

Now this chart is of BGZ and the S&P 500. Do you see that this fund is down about 43% since inception despite the S&P being down 2%? Both funds are decaying.

So while I don't have a mathematical model on how these funds are constructed, it seems that the most sensible may to play these funds for the long term, is to SHORT THEM BOTH! If you shorted them both at inception you would be up about 34% on one and 43% on the other despite the S&P going basically nowhere from start to finish.


Now if the funds both decline in value to very low levels, you probably won't get large enough % changes to make them worth shorting, but for now, it is certainly something to consider. In fact, if anyone wants to look into this further, Direxion just launched 2 new 3x funds specifically mirroring the S&P 500. The bullish fund is UPRO and the bearish fund is SPXU. So, while I am not officially recommending this, it certainly may make sense to short both these new funds for a time.


I have considered something of this nature for a while for blog purposes, but from my perspective I think I will wait until I believe the bear market is almost over, and then suggest shorting BGZ at that time, as the result would probably be a near 100% gain by the time the next major leg up in the markets gets underway. It would probably also be a decent idea to short BGU right now, if my outlook is correct on the markets falling further.


In any case, I know that most people who follow this blog probably have recognized both the benefits and dangers of these funds, but I wanted to make it very clear, and make sure that everyone knows not to get tied up in holding a losing trade for several months on these funds. Even if the market comes back your way, the fund may have decayed so much, that you never get back you investment, or the gain will be smaller than you may expect.