Back to top

ETF News And Commentary

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 - ETF report) - 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 - ETF report) or (EEM - ETF report) 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 - ETF report) - 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 - ETF report) 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 - ETF report) - 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 - ETF report). 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).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Author is long VWO.

Please login to Zacks.com or register to post a comment.

If you wish to go to ZacksFunds.com, click OK. If you do not, click Cancel.

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
SYNAPTICS I… SYNA 78.11 +8.14%
CENTURY ALU… CENX 19.88 +5.74%
GREEN PLAIN… GPRE 39.41 +5.12%
PILGRIM'S P… PPC 28.82 +3.08%
THE PANTRY… PTRY 18.41 +2.79%