Why You Should SELL 3x Gold Mining ETFs JNUG and NUGT Today

Gold's rallying, and for good reason. But beware the caprice of 3x ETFs.

Shares of 3x leveraged gold ETFs Direxion Daily Gold Miners Bull 3X Shrs (NUGT) and Direxion Daily Jr Gld Mnrs Bull 3X Shrs (JNUG) are rocketing higher Friday, with each up more than 25% in midday trading.

direxion-logo-185But just because the price action is so overwhelmingly bullish today doesn’t mean you should pile into NUGT and JNUG. In fact, if history is any guide, buying on such an overwhelming uptick could really come back to bite you, and quickly.

Here’s why you should sell out if you own either ETF.

NUGT, JNUG: Traders’ Dream Stocks

NUGT and JNUG are part of the leveraged exchange-traded product family that seeks to offer two or three times the return (or inverse of the return) of some underlying index, usually through the use of derivatives that give leveraged exposure to said index.

In this case, NUGT seeks to earn 300% of the daily returns of the VanEck Vectors Gold Miners ETF (GDX), while JNUG seeks 300% of the VanEck Vectors Junior Gold Miners ETF (GDXJ) returns.

For traders with very short time horizons that seek to trade in and out of positions every few days, 3x levered ETFs like these are dream instruments. But longer-term, they are reliably nightmares.

JNUG was conceived in 2013, and in October of that year it traded at a split-adjusted $10,400 per share. Today it’s trading around $130/share. NUGT’s returns are even worse, if you can believe it: Since its 2011 highs trading at a split-adjusted $210,900, it has plunged to below $100/share.

It’s not because these funds have lost that much in actual “value.” These are trading instruments only, so whenever their prices get low enough, they reverse-split their shares to trade at more “normal” prices. (For instance, NUGT has executed three reverse splits since 2013.)

So it’s simply the way these ETFs are designed that makes them bad long- or even medium-term investments. Most traders know that.

But what makes them bad short-term plays?

First of all, it should be said that the upward move in gold miners today is justified, as gold prices themselves are up about 2.5% to the $1,240 per ounce level amid a horrible May jobs report. The nonfarm payrolls increased by 38,000 in May, dramatically lower than the 158,000 economists expected — makes it far less likely that the Federal Reserve will raise rates interest rates at its policy meeting this month.

A decision to raise rates and tighten would’ve put upward pressure on the dollar, making it stronger against global currencies, and gold, which is priced in U.S. dollars, tends to have an inverse relationship with the U.S. dollar. Lo and behold, the dollar is strongly down, and gold, as we mentioned, is up significantly.

It’s also worth noting that rising rates would make other interest-bearing assets more attractive compared to gold, which pays no dividends to investors.

So with rates unlikely to rise immediately, JNUG and NUGT have a natural catalyst.

But this is a short-term deal. Since the very design of levered ETFs like JNUG and NUGT virtually guarantee awful long-term performance, traders should move in and out quickly. Being a contrarian — especially after a bullish price move — is vital to a successful levered ETF trading strategy.

If you look back at the last couple of moves higher in NUGT, for example, you’ll see that these drastic, 20%-plus moves are often short-lived, lasting one or two days, and quickly falling back down to earth again.

On April 27, NUGT traded at $88.21. By the 29th, it was above $119. Three trading days later (May 4), it was back below $88/share. Two trading days after that (May 6), NUGT had rebounded to $107. And the very next trading day (May 9), the ETF was back to $87.

Short-term trades are just that — short-term — and smart traders try to lock in their gains before they’re gone. That’s not just the case in leveraged instruments, but plain, straight-forward gold trades as well. All of that creates selling pressure that helps swing leveraged funds like JNUG and NUGT to the downside.

Unless you’re trying to go gray (and broke) in a hurry, sell on today’s upswing. In a few days, you’ll be glad you did.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at [email protected]

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Article printed from InvestorPlace Media, https://investorplace.com/2016/06/sell-3x-gold-etfs-jnug-nugt-today/.

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