Imagine this: You're rather certain that the stock market will surge this year. What should you do? Well, of course you can invest in individual stocks, as always. And you can invest in broad-market index funds, which will deliver the market's (expected) massive gain. But wouldn't you like more than that? Of course you would! Fortunately, there are investments out there that will leverage your money (when you see the word "leverage," think "borrowing"), and let you earn double the market's return.
The investing world has just gotten even more exciting than that, though. The folks at Direxion Funds have just announced that they're introducing a slew of exchange-traded funds (ETFs) that will let you bet for or against a host of indexes, with triple leverage. (ETFs combine features of individual stocks and index funds. Read all about them and how they offer some valuable advantages over traditional mutual funds in our ETF Center.)
Along with ETFs both long and short on the S&P 500, there will be ones focused on other indexes, such as the MSCI Emerging Markets Index, the S&P Latin America Index, the Financial Select Sector Index, and the Dow Jones U.S. Real Estate Index, among many others. If you're pretty sure that companies such as ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) are on the downswing, you'll do well with the ETF that's short the Energy Select Sector Index. Just about 30% of its assets are in those two companies alone, with other investments in firms such as Schlumberger (NYSE:SLB), Apache (NYSE:APA), and EOG Resources (NYSE:EOG).
What to do
So now that you're aware of these upcoming offerings, should you line up to buy into them? I say no. With these triple-leveraged ETFs, if their underlying index, such as the S&P 500, advances 17% this year, you might hope to make 51% -- but you may end up with far less.
Even if you could actually triple your annual returns, I still wouldn't think it's a good idea. Because not only do these funds amplify your gains, they'll also multiply any losses. If the underlying index sinks by 10%, you'd lose 30% -- a hefty sum. The S&P 500 dropped 22% in 2002 -- would you want to lose 66%? (I thought not.)
Another consideration is that with the ETFs that are short various indexes, you'll essentially be market-timing, and betting against the long-term historical trend of the market. Yes, some people do well timing the market -- for a while. But many times that's just thanks to luck. No one has been able to correctly and consistently time the market.
For advice on how to invest better with ETFs and mutual funds, take a look at our Champion Funds newsletter. Each issue comes with fund recommendations and cutting-edge news. It's yours for the taking with a 30-day free trial.
