The Triumphs (and Troubles) of Trebles

by Kyle Woodley | March 28, 2012 9:12 am

The Triumphs (and Troubles) of Trebles

Regardless of the litany of warnings most financial advisers list off about leveraged exchange-traded funds, two things continue to ring true: They’re still as quick a way to make a buck as any, and thus investors will continue to ignore the risks — for better or worse.

This is well-illustrated by the Bespoke Investment Group, which compiled a full listing of all the triple-long and triple-short ETFs[1], as well as their year-to-date performance.

Of particular interest were some of the best and worst. These funds not only feature monster gains (and daunting losses), but actually paint a fairly accurate picture of 2012’s first quarter. Here’s a look at the five best and five worst triple-leverage funds so far, according to Bespoke:

5 Best
Fund Sector Long/Short YTD Change
TYH[2] Technology Long +83.95%
TQQQ[3] Nasdaq 100 Long +81.84%
SOXL[4] Semiconductors Long +74.88%
FAS[5] Financials Long +72.52%
RUSL[6] Russia Long +57.22%
5 Worst
FUND SECTOR LONG/SHORT YTD CHANGE
SFSA[7] S&P 500 Short -59.71%
RTSA[8] Russell 2,000 Short -52.74%
SOXS[9] Semiconductors Short -48.69%
TYP[10] Technology Short -47.72%
RUSS[11] Russia Short -47.53%

And looking deeper, 25 of the 27 triple-long ETFs were in the black, while every listed triple-short ETF lost money to date.

Immediately, it’s easy to see which Chicago pro sports team is better off: Bulls 1, Bears 0. Which really is the overarching market story of the year. The Nasdaq (+20%), S&P 500 (+12%) and Dow Jones (+8%) and have all posted monster gains and broken through landmark figures. In short: If you bet against the market for any significant period of time this year through a leveraged ETF, you probably lost.

Amid the forest are some of the year’s other big trees. Tech stocks took off, propelling the TYH as well as numerous other funds, including tech-heavy Nasdaq-tracking ETFs, as well. While the loudly ballyhooed story of financials is represented by the 72% gain in the FAS, semiconductors also made a less-publicized march. Broadcom (NASDAQ:BRCM[12]) is up 32%, and Intel (NASDAQ:INTC[13]) has beat out the S&P 500 at +16%. And Micron (NASDAQ:MU[14]) has more than withstood the early February death of CEO Steve Appleton, posting 36% gains year-to-date.

While most investors inundated with tales of China, Brazil or India might have been surprised to find that the Russian 3x long ETF took the taco, it — and the success of the China and BRICs leveraged long funds — illustrate just how strong emerging markets have been this year. Even the boring ol’ MSCI Emerging Markets ETF (NYSE:EEM[15]) is up almost 15% so far.

Still, Bespoke points it out — and it’s worth repeating, again and again — leveraged ETFs are full of risk. They don’t hold actual equities; they merely track indices based on daily returns, and they use kinky algorithms to produce those multiple returns. Given this system, there’s a lot of wiggle room.

TYH 300x173 The Triumphs (and Troubles) of Trebles
Click to Enlarge
A good illustration of this is a chart of the 3x long and 3x short technology funds, TYH and TYP.

As you can see, while they move with some semblance of symmetry, the numbers don’t come out quite as you’d expect on face value, with TYH up 84% and TYP down 47%. And it doesn’t always work out this way with leveraged funds — sometimes the losses are more exaggerated.

So, as always, be careful. But if you have a strong, short-term hunch, leveraged ETFs can be one of the most profitable ways to play it.

Bespoke’s full charts and report can be viewed here.[16]

Kyle Woodley[17] is the assistant editor of InvestorPlace.com[18]. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @KyleWoodley[19].

Endnotes:
  1. full listing of all the triple-long and triple-short ETFs: http://www.bespokeinvest.com/thinkbig/2012/3/27/triple-leveraged-long-and-short-etfs.html
  2. TYH: http://studio-5.financialcontent.com/investplace/quote?Symbol=TYH
  3. TQQQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=TQQQ
  4. SOXL: http://studio-5.financialcontent.com/investplace/quote?Symbol=SOXL
  5. FAS: http://studio-5.financialcontent.com/investplace/quote?Symbol=FAS
  6. RUSL: http://studio-5.financialcontent.com/investplace/quote?Symbol=RUSL
  7. SFSA: http://studio-5.financialcontent.com/investplace/quote?Symbol=SFSA
  8. RTSA: http://studio-5.financialcontent.com/investplace/quote?Symbol=RTSA
  9. SOXS: http://studio-5.financialcontent.com/investplace/quote?Symbol=SOXS
  10. TYP: http://studio-5.financialcontent.com/investplace/quote?Symbol=TYP
  11. RUSS: http://studio-5.financialcontent.com/investplace/quote?Symbol=RUSS
  12. BRCM: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRCM
  13. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
  14. MU: http://studio-5.financialcontent.com/investplace/quote?Symbol=MU
  15. EEM: http://studio-5.financialcontent.com/investplace/quote?Symbol=EEM
  16. Bespoke’s full charts and report can be viewed here.: http://www.bespokeinvest.com/thinkbig/2012/3/27/triple-leveraged-long-and-short-etfs.html
  17. Kyle Woodley: http://investorplace.com/author/kyle-woodley/
  18. InvestorPlace.com: http://investorplace.com/
  19. @KyleWoodley: https://twitter.com/#%21/kylewoodley

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