Leveraged ETFs are often very volatile. And the Direxion Daily Junior Gold Miners ETF (NYSEARCA:JNUG) may be the most wild leveraged ETF of all. JNUG stock used to seek to magnify the returns of an index of small miners by 300%.
During the market crash in March, junior gold mining stocks got pummeled. Throw 300% leverage on top of that, and the junior gold miner ETF had an absolute bloodbath.
The shares plunged as much as 96% in the span of a few weeks. That’s not a misprint; JNUG stock plummeted from a (split-adjusted) $1,000 per share earlier this year to less than $40 at one point in March.
As a result of the catastrophic declines of many of its magnified ETFs, Direxion, which operates the Daily Junior Gold Miners ETF, reduced the magnification ratio on a number of its various products, including the Junior Gold Miner ETF, to 200%.
Leverage’s Devastating Impact
In the wake of the magnification reduction, the ETF seeks to achieve only double the return of its underlying index. As a result, the shares have recovered less than their owners may have expected as gold stocks have jumped. Even after the index of junior gold miners rallied more than 100% since March, the ETF has only clawed back to $100 from its low in the $30s. Remember, it had reached $1,000 per share in February.
So far this year, the junior gold miners’ index is actually up. Yet, after its recent bounce, the Daily Junior Gold Miners ETF is still down 90% from its prior highs.
That is the corrosive impact of high leverage on a fund. Consider that on a single day in March, the junior gold miners’ index lost more than 20% of its value. Thus, the ETF, which still sought to magnify the index’s return by 300% at that time, lost more than 60% of its value on that day, plummeting from $344 to $132.
JNUG Stock Is Still Unsafe
Direxion’s decision to reduce the ETF’s magnification was a step in the right direction. But the negative impact of the 300% leverage will still affect the ETF going forward. Tezcan Gecgil’s recent article explains that issue in detail.
Even if it had been magnified only 200% at the time, JNUG stock still would have lost more than 40% of its value on that single day in March. That’s better than losing 60% in a day, but it’s still an utterly unacceptable outcome for a long-term investor. These leveraged products are designed for speculators. For those who are aware of the risk posed by the ETF and use it for pure short-term trading, it might make sense.
But beware of the common trap of buying a stock for a short-term trade and holding it too long. Since its inception, on a split-adjusted basis, JNUG stock has dropped from $35,000 per share in 2013 to just $100 now. That’s a loss of more than 99.5%.
The Verdict on JNUG Stock
The best thing I can say about the ETF is that, after its leverage fell, it’s not quite as bad of an investment as it used to be. But make no mistake; historically, it has been one of the most atrocious ETFs around. Reducing its magnification will only modestly improve its results.
It’s simply crazy to attach a ton of leverage to a sector as volatile as junior gold miners. Leveraged funds that track less volatile investment vehicles, such as generic treasury bonds or the S&P 500, won’t drop as much as the Junior Gold Miners ETF has. In a sector that often goes up or down 10% or more in a single day, however, the magnification is simply a killer.
For investors who absolutely must have access to leveraged gold mining stocks for day trading, the ETF will fit the bill. But it is not intended to be held for a long period of time. As the March fiasco showed, magnified ETFs that track volatile sectors are toxic.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.