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This Is Not How You Triple Your Money

By Rick Aristotle Munarriz | More Articles
June 26, 2009 | Comments (7)

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If the S&P 500 isn't enough for you, maybe you just need to juice it up.

ProFunds Group is expanding its already massive portfolio of ProShares exchange-traded funds, including yesterday's debut of UltraPro S&P500 (NYSE: UPRO  ) . The ETF aims to deliver 300% of the S&P 500's daily gains. But cheer up, bears: UltraPro Short S&P500   (NYSE: SPXU  ) targets triple the daily results of shorting the same index.

If this sounds like the kind of high-octane pizzazz that your portfolio is longing for, do the math. These ETFs-on-steroids that hit the market may sound great in theory, but reality hasn't been kind to them.

ProShares already has a pair of ETFs that promise to double the daily performance of the S&P 500. How are they holding up against the SPDR Trust (NYSE: SPY  ) , which simply mirrors the popular index?

 

2009 Return

SPDR Trust

2.0%

Ultra S&P 500 (NYSE: SSO  )

(0.5%)

UltraShort S&P 500 (NYSE: SDS  )

(22.1%)

Returns exclude dividends.

See the problem? The doubled-up long fund hasn't delivered a 4% gain year to date. The jacked-up short fund is off by far more than 4%. These vehicles may be great for nailing a single day's return, or occasionally landing within the ballpark of an entire week's run. But they can be catastrophic over the long haul, particularly if they get whipsawed during volatile markets. Go figure: These magnets of speculation can ironically crumble at the first signs of volatility.

Need a little more proof?

Direxion Daily Financial Bull 3x Shares (NYSE: FAS  ) and Direxion Daily Financial Bear 3x Shares (NYSE: FAZ  ) play both sides of the financial-service stocks within the Russell 1000 index -- they swing for 300% of the movements.

At least one of them has to be a big winner in this roller-coaster market for banking stocks, right? Wrong. The bullish fund is trading 64.6% lower than it was when the year began. If you think that's bad, the bearish fund is off by a whopping 86.5%. 

If you're a speculator looking for a day-trade gamble, these may be your lottery tickets. However, if you're a serious long-term investor, you don't want to get anywhere near these funds. 

The numbers say it all. You'll triple your trouble before you triple the market's returns.

Some other reads that may double -- or triple -- your ETF knowhow:

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Longtime Fool contributor Rick Munarriz always seems to have a fund or two in his portfolio, but he owns no shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.


Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 27, 2009, at 8:41 PM, guesswhothisis1 wrote:

    wow I don't think anyboby would buy a hold a triple etf. Hmm let see I think maybe you would trade in and out of this etf like everboby else. This is just anther stupid story these folls put on.

  • Report this Comment On June 28, 2009, at 12:12 AM, alixggtrader wrote:

    I've traded the Direxion 3x ETFs. Specifically the BGU and BGZ bull/bear pair. I definitely have not tripled my money on the 3x's. Doubled.... yes. But not tripled. BTW, making this return takes a lot of work, fine-tuning and backtesting a strategy (over a limited timeseries) and a bit of money.

    The big problem with investing in leveraged ETFs, especially the 3Xs such as Direxion, is that most "investors," including the writer of this article, have not read the prospectus and articles that Direxion has placed in its website (http://www.direxionshares.com) . If you do not read and figure out EXACTLY how these ETFs work, you're just throwing money away. It's like going hunting at nighttime with a blindfold and your hands tied.

    Direxion states in BIG BOLD LETTERS at the home page:

    "Daily Investment Goals

    Not Monthly Investment Goals

    Not Annual Investment Goals"

    Duh. These are leveraged instruments that have a built-in cost-of-carry, transaction costs, etc to support the 3x feature. IT DOESN'T COME FREE, FOLKS!!!

    Direxion states that these are not for investing. They are for TRADING. Big difference. Double Duh.

    Bottom line: DO NOT trade the 3x ETFs such as BGU ("BigUp") or BGZ ("BigZero") if you have no real knowledge about derivatives trading. Handwaving generalized knowledge won't do. You need to know the underlying quantitative theories. If not, you will get badly [explitive]'d with the xxx ETFs.

    Seriously, if you do not know EXACTLY how the 3x ETFs work, do not trade them. As an alternative, you're most probably better off taking long CALL or PUT option positions in a true shares-based ETF (eg. SPY). You'll participate in the leverage, but the time decay, which is not hidden from you in an option, will keep you from leaving your money rot away if you realize that you've taken a wrong side.

  • Report this Comment On June 28, 2009, at 1:29 PM, henryking54 wrote:

    Didn't Shannon Zimmerman, the "advisor" of Ready-Made Millionaire, purchase a leveraged ETF for the RMM portfolio? If leveraged ETFs are so bad, why did he purchase one? Is Zimmerman an idiot?

  • Report this Comment On July 04, 2009, at 2:16 PM, lrmacds wrote:

    Here is another piece of data: at the market bottom on March 9, 2009, the year-to-date return of S&P 500 was -25%, and that of SDS was +62%. What do you have to say to that, Mr Munarriz?

  • Report this Comment On July 23, 2009, at 9:54 AM, Fool wrote:

    I bought SSO last year under the advice of a firm that I hired June of 2008. Boy was I stupid. I got my tale handed to me because I did not do my homework. I Bought in multiple lots on the way down with the idea I would hold it until it turned around. I finally caved in after losing 25% of my principle. I have been kicking myself ever since for being so ignorant.

  • Report this Comment On November 23, 2009, at 7:25 PM, br10t wrote:

    hmmm, I keep referring back to this article.

    On the day UPRO came out (the day before this was written), I bought in and HAVE held (feeling a prolonged bull was coming...and now continuing).

    Results S&P 500 up just under 20%... Me?!? Up over 60%. hmmm, a 3x ETF up over 3x through a 5 month period.

    Mr. Munarriz, you may not want to quit your day job.

  • Report this Comment On November 23, 2009, at 7:26 PM, br10t wrote:

    hmmm, I keep referring back to this article.

    On the day UPRO came out (the day before this was written), I bought in and HAVE held (feeling a prolonged bull was coming...and now continuing).

    Results S&P 500 up just under 20%... Me?!? Up over 60%. hmmm, a 3x ETF up over 3x through a 5 month period.

    Mr. Munarriz, you may not want to quit your day job.

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Related Tickers

2/14/2012 4:00 PM
SPY $135.19 Down -0.17 -0.13%
S&P Depository Rec… CAPS Rating: No stars
SSO $53.67 Down -0.04 -0.07%
Proshares Ultra S&… CAPS Rating: *
SDS $16.59 Up +0.04 +0.24%
UltraShort S&P500… CAPS Rating: *
FAS $88.15 Down -2.17 -2.40%
Direxion Daily Fin… CAPS Rating: *
FAZ $26.61 Up +0.62 +2.39%
FINANCIAL BEAR 3X CAPS Rating: *

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