Three Worst Performing Leveraged ETFs of 2011 - Leveraged ETFs
30 December 2011 - 8:17PM
Zacks
Despite the fact that most leveraged and inversely leveraged
ETPs are designed to be held for a single trading session, many
investors still hold the products for multiple trading periods.
This can often result in performances that deviate significantly
from the underlying and can cause huge losses when markets are
oscillating wildly, thanks to the daily resetting feature inherent
in most leveraged ETFs (for more on this read Understanding
Leveraged ETFs). This was especially the case in 2011 as pretty
much all corners of the market saw huge swings on a nearly daily
basis, pushing many leveraged ETFs to incredible losses on the
year.
Yet even among these securities, there was a pretty wide
distribution in terms of performance. Some managed to surge higher
on the year—such as those in the Treasury and defensive equity
sector spaces-- while most others finished the year sharply lower
with the biggest losers ending the year down at least 60% from
their starting point in January. Thanks to these huge losses in
some of the popular leveraged ETFs, it is worth noting how
dangerous holding these products over the long term can be in a
portfolio. In light of this, we take a closer look at three of the
biggest losers in the leveraged ETF world over the course of
2011:
Direxion Daily Emerging Markets Bull 3x Shares (EDC) - Down 64%
year-to-date
This fund looks to give investors exposure to the MSCI Emerging
Markets Index with 300% leverage on a daily basis. This is the same
index as popular unleveraged emerging market funds such as VWO or
EEM which have lost about 21.5% in the same time period. It is
worth noting that the fund was pretty solid during the first part
of the year but then proceeded to lose roughly half of its value
during the tumultuous period of late July and early August. EDC
never recovered after this significant blow, and continued to trend
lower throughout the rest of the year (also read Top Three BRIC
ETFs).
Direxion Daily India Bull 3x Shares (INDL) - Down 66.8%
year-to-date
INDL tracks 300% of the daily performance of the Indus India
Index a benchmark of 50 large cap companies based in India. The
fund has been on a slow decline for much of the year, much like
other Indian securities which have been ravaged by inflation and
slowdown fears. In fact, the unleveraged India Small Cap ETF (SCIF)
lost 55.7% in the time period despite tracking just a 1x benchmark.
Interestingly, INDL was actually a 2x fund for much of the year—it
switched over on the first of December-- so its inclusion on the
list suggests that India really saw some volatile trading for much
of the year and that it was an extremely rough period for investors
in this region of the world (read India ETFs: Behind The
Crash).
Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV) - Down 68.1%
year-to-date
This fund tracks 300% of the inverse of the performance of the
NYSE 20 Year Plus Treasury Bond Index, giving investors leveraged
inverse exposure to the return of American Treasury securities
heavily skewed towards debt that matures at least 24 years from
now. This is similar, although not identical, to an index employed
by ProShares and its unleveraged short bond ETF in the space, TBF.
That particular fund has declined by close to 29% on the year
suggesting that the ‘decay’ hasn’t been as bad in this segment of
the market. Instead, TMV, thanks to the flat nature of Treasury
bonds over the past month, has managed to do slightly better than
what some might have thought, although this could certainly change
if volatility returns to the U.S. Treasury market in 2012 (also see
The Best Bond ETF You Have Never Heard Of).
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Author is long VWO.
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