Give me the YINN and the YANG: Why I am betting against both long and short Chinese leveraged ETF garbage
Either way I play it, I expect to win
Direxion is a purveyor of something called a triple leveraged ETF, or 3x ETF. A 3x ETF is like the crack cocaine of day trading. Each day, the fund seeks a 300% return on the underlying asset. The next day, the fund is reset.
Direxion wants to be like the casino, winning either way. So what they do is put out a Bull 3x ETF and a Bear 3x ETF for the underlying asset. So let’s say the asset is the S&P 500. You can “invest” in either SPXL or SPXS. L is for Long. S is for short.
If the S&P 500 goes up 2% tomorrow, SPXL should go up 6% and SPXS should go down 6%. For daily trading, everything looks good. Or so it seems to the novice investor. But in reality that investor is getting robbed. (Sort of. I mean, after all they should have read the agreement.)
Here’s a link to the pdf Direxion puts out with all of their leveraged ETFs: https://www.direxion.com/uploads/Direxion-ETFs-List.pdf
3x ETF’s shed value over time. Some 3X ETF’s shed a little value. Some shed a lot. In order to make the 300% return, the fund manager has to employ leverage in the market. The fund manager has to buy futures contracts on the underlying asset. This leads to constant little hits, such as interest on margins and insane fees, and occasional big hits, such as contango. Contango occurs when the future value of an asset is higher than the current value.
So let’s do a quick thought experiment. Let’s say that you held both the 3x Bull and the 3x Bear in your portfolio for a year or two. Would you come out even? Since they are both measuring the same asset, wouldn’t it add up to a wash?
Eventually, no. You would always lose eventually. There could be short run wins where the one has a +100% gain (you can’t go further negative than 100%), but in the long run, both will be dragged down. Some will be dragged down massively.
The longer you hold 3x ETFs, the more likely both the Bull 3x and the Bear 3x will be negative returns.
Again, just how bad it gets depends on the way the underlying asset is traded and managed. As I said, some are worse than others.
One of the absolute worst is the Direxion 3x ETFs for the China FTSE. These are humorously ticketed with the symbols YINN (Bull) and YANG (Bear). To get an idea of how awful these “investments” are, have a look at the 5 year chart comparison for them, via Google Finance:
As you can see, over the past 5 years, both the Bull 3x (in blue) and the Bear 3x (in yellow) are down over 75%!
There is no way you can hold these instruments of capital destruction in your portfolio and win, long term.
So how is it that I’m going to make money off them?
By betting against them both.
Let me show you how.