Monday, January 5, 2009

Direxion Triple ETFs Add New Horses to Stable

While skeptics abound about the usefulness of triple ETFs for the long-term investor, I have been saying since early on that the Direxion triple ETFs would revolutionize day trading.

Now that their novelty has worn thin and traders have had an opportunity to experiment with various approaches to trading triple ETFs, these vehicles have become an integral part of the day trading scene, particularly on trend days.

Looking to capitalize on the appeal of these nuclear-tipped trading weapons, Direxion added six new triple ETFs last month. While interest in the new round of ETFs has so far been limited, I predict at least one of the triple ETF pairs has a bright future. My candidates for stardom are the pair of emerging markets ETFs: the 3x bull (EDC) and the -3x bear (EDZ). The reason is simply a lack of competition. At the moment, competition comes in the form of EEV the -2x UltraShort MSCI Emerging Markets ETF from ProShares. While EEV is a popular double inverse ETF, it lacks a companion +2x version for those who want a leveraged bullish play on emerging markets without having to short EEV.

It is harder to see the other new ETF pairs attracting the same attention that the emerging markets are likely to receive. Technology is a favorite investment theme and a source of considerable volatility, but the current ROM (2x) and REW (-2x) have always been second tier ETFs in terms of popularity, lagging well behind QLD and QID, the popular NASDAQ-100 ETFs. The new Direxion entries, TYH (3x) and TYP (-3x) clearly have their work cut out for them.

Last but not least are a pair of ETFs based on the MSCI EAFE index of developed markets and the popular EFA ETF that tracks this index of European, Australasian and Far East companies. The 3x bull (DZK) and the -3x bear (DPK) have a lot of appeal to me as a means by which to speculate or hedge in non-U.S. companies, but whether these funds will receive the same kind of attention as EFA remains to be seen.

For the record, Direxion has outlined their intention to expand the stable of triple ETFs to 32 in their current prospectus. The ETFs currently in the pipeline have a strong international (China, India, Latin America, BRIC) and sector (clean energy, real estate, homebuilders) flavor. The graphic below shows the triple ETFs currently available, with the recent additions circled in red.

These ETFs are not for the faint of heart and anyone who considers trading these might want to read my initial post on the subject to get a sense of some of the risks involved.

[source: Direxion]


Eric said...

Bill, I love these vehicles. I have been Long FAS, TNA, and BGU in various forms since the Nov lows and love the risk/reward on these. Thanks for the updates on the new ones.
Anything I should be watching for here? I cannot find any conditions for shutting the ETFs, like they did with the macroshares short oil trust in July.

Bill Luby said...

Hi Eric,

As long as there is sufficient volume (and I'd give it a few months of trading before I'd get concerned), I would not worry about any of these. The first eight of the Direxion ETFs all traded over 1 million shares today, so their longevity seems assured.

From a performance perspective, these triples tend to do extremely well (poorly) in trending markets, but lose value over time in choppy markets, which is all the more reason to take profits if the tide starts to turn against a winning position.

Holding one of these for a week can feel like holding some stocks for a year.

Finally, there were no distributions in 2008, but I would expect some large distributions in 2009. We will probably not know the timing in advance, so there could be a case for closing out any positions early in December.



Anonymous said...

Thanks for your update! I have yet to get comfortable with these ETFs. Is there anyway to find out/track which funds these Direxion Triple ETFs follow within their portfolio for specific funds i.e. FAS/FAZ or the new Tech Fund (like QLD & QID follows the Qs/Naz100)?

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