When stocks or ETFs are skyrocketing, investors face a choice: succumb to the hype and hope for dazzling triple-digit returns, and buy in … or stay away for fear of an impending crash?
Then there’s the situation that pops up on the other side of the coin …
Just like irrational exuberance in a given sector can drive an ETF much higher, irrational gloom can crater it. And when the latter happens, we’ve got potential value on your hands.
You can lose your shirt if you climb onto a speeding train and it derails. But if you climb aboard a train wreck … sure, there’s the possibility that the whole thing falls off a cliff and kills you, but you’re more likely to get the train running again. After all, the old adage is that there’s lots of money in buying when there’s blood in the streets.
So, with that in mind, are any of these three poor-performing ETFs worth buying?
Beaten-Up ETFs – ProShares Ultra VIX Short-Term Futures ETF (UVXY)
Year-to-Date Performance: -64%
Trailing-12-Month Performance: -82%
The volatility-based ProShares Ultra VIX Short-Term Futures ETF (UVXY). This fund has lost nearly four-fifths of its value in the past 12 months — I guess luckily for anyone who foolishly held that long, it’s at least flat over the past three.
The UVXY aims to return two times the performance of … listen, it’s confusing. It bundles certain VIX futures contracts together, traces their movements, and is ultimately going to “track changes in the expectation for one month in the future.” In other words, this fund is all leverage and derivatives. Moreover, it doubles performance on a daily basis, which leads to compounding issues that can really accelerate its returns … but also its losses.
There’s no such thing as “value” in a fund like this. This is an instrument for traders who are far more patient than myself. Unless you sit in front of a trading desk for eight hours a day, stay away.
Beaten-Up ETFs – Direxion Daily Junior Gold Miners Bear 3x ETF (JDST)
Year-to-Date Performance: -80%
Trailing-12-Month Performance: -68.6%
The Direxion Daily Junior Gold Miners Bear 3x ETF (JDST), which is down almost 80% this year and is just off its bottom, is intriguing to me.
This ETF tracks the small-cap gold mining companies in the Market Vectors Junior Gold Miners Index (GDXJ) — companies like Silver Standard Resources (SSRI) and Sandstorm Gold (SAND) — and tries to produce three times the inverse of their performance. Ergo, should GDXJ fall 1%, JDST should go up 3%. (Of course, with leveraged funds, that’s never the case.)
So, JDST is a bet that these companies will do miserably, but they’re doing quite well this year. The question is: Does a contrarian play exist here?
I think gold is actually more likely to go higher than lower, meaning the companies should do better. So while I don’t like the leveraged aspect that some ETFs carry, this ETF does trigger an idea to buy the GDXJ. It’s non-leveraged and invests in the junior gold miners.
That’s worthy of consideration in this crappy economy where gold’s path of least resistance is up.
Beaten-Up ETFs – Direxion Daily Russia Bull 3x Shares (RUSL)
Year-to-Date Performance: -55%
Trailing-12-Month Performance: -50%
The $116 million Direxion Daily Russia Bull 3x Shares (RUSL) attempts to offer three times the return of the Market Vectors Russia Index — an index of 49 stocks that I can’t pronounce and that I don’t recognize.
The RUSL has been halved over the past year, though the bleeding has at least stopped to flat performance in the past three months. Still, Russia is notorious for its corruption, making investing in the country an absolute wild card — and that’s without considering other risks such as geopolitical tensions.
Frankly, even if there was value, it wouldn’t be for a long-term holding period. Leveraged funds are great to hold for a few days or weeks at a time, but nothing more.
But considering the underlying market we’re talking about, we’re not talking about value — just Russia’s latest swing.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets at @ichabodscranium.
