Deterioration Risk;
Daily Trading Only;
For example Direxion Daily Jr Gold Miners Bull 3x ETF (JNUG) was down 19.35% last friday. Perhaps that was just one bad day? Nope, over the past three months, JNUG is down 83.95%.But, even the Direxion Daily Gold Miners Bear 3x ETF (DUST) is down 38.99% over the past month and while investors who own Direxion Daily Jr Gold Miners Bear 3X ETF (JDST) made 20.64% last friday, the ETF is still off by more than 40% over the past month and 76.84% over the past year.
Leverage Exponentially Increases Gains and Loses;
Another great example of the potential danger from the leveraged ETFs actually comes from the best performing year-to-date 3X ETF, the Direxion Daily Real Estate Bull 3X ETF (DRN). DRN is up 100.25% thus far in 2014. DRN is clearly killing the S&P 500's 11.8% year-to-date gain, but I see two big issues here.
First, in order to get that sort of performance, investors have taken quite the roller-coaster ride. DRN was at $67.20 on September 5th, but was down to $52.73 on September 25th. That’s a 21.53% fall in just 15 trading days. When we compare that fall to the market as a whole, on September 5th the S&P 500 was at 2,007.71 and fell to 1,965.99 on the 25th. So for argument's sake, we could say the market was also down during that time frame, but it only fell by 2.07%, a 19.66% difference.
Key Take-Away
Even though ETFs provide diversity and reduce investors' risk, not all ETFs are created equal. Using leverage is very dangerous and only those investors who fully understand the risks and can sustain massive losses should be using it to increase gains.
Lastly, what's so bad about just a standard un-leveraged ETF anyways? If you were to ask most investors, they would gladly take a low risk 7% return annually over an extremely high risk roller-coaster ride any day. Just remember next time you see massive year-to-date returns from a leveraged ETF, the tortoise always beat the hare （乌龟与兔子赛跑的故事，大家应该知道）.
