The stock market’s recent volatility has brought about a new generation of traders who use low-cost brokers in order to place trades via apps. But with many of the barriers to trading removed, quite a few novice traders have decided to dive in the deep end using complex investment vehicles to make a quick buck. Increasing interest in Direxion Daily Junior Gold Miners Bull 2X ETF (NYSEARCA:JNUG) stock is a perfect example.
Data from millennial-favorite trading app Robinhood shows that JNUG was one of the app’s most popular ETFs, with more than 43,000 investors adding it to their holdings. The platform also noted that it believes its users could make up a significant portion of the leveraged ETF’s holders.
Why JNUG is Riddled With Risk
Leveraged ETFs are often regarded as sophisticated investment vehicles that should be left to the pros, or at the very least, seasoned day-traders. There are a few reasons for that, one of them being the discipline and understanding investors need in order to use them properly.
As InvestorPlace’s Tezcan Gecgil laid out in detail earlier in May, JNUG isn’t a simple bet on gold. It tracks the MVIS Global Junior Gold Miners Index and aims at delivering a 200% or -200% return for that index each day. Importantly, the ‘single day’ aspect of JNUG’s leverage means it’s not a stock you can add to your portfolio and hold on to because the losses will add up.
Plus, the gold miners JNUG is investing in are some of the riskiest in the business. Add in ongoing gold price volatility and you have a recipe for a nail-biting investment vehicle that isn’t worth the headache for 9 out of 10 retail investors.
First Time Traders Dive in Deep
What’s troubling is the fact that Robinhood’s user base is primarily made up of retail investors. In fact, the firm even claims most of them are trading stocks for the first time ever. It’s hard to imagine any scenario in which Robinhood’s traders should be picking up JNUG stock — unless they’re day traders.
The lockdowns gave people more time to take an interest in their financial health, and many have pursued investing as a result. But the sudden leap into risky investments like JNUG stock and bankrupt rental car company Hertz (NYSE:HTZ) has been unexpected.
Anecdotal evidence suggests that some of the interest comes from ex-sports betters who are used to taking on a great deal of risk. This brand of traders is best characterized by Dave Portnoy of Barstool Sports, who has been trading since the March crash and updating followers on his bets via videos uploaded to social media.
Leave Gambling Out of It
As I mentioned before, there’s definitely a market for JNUG stock, but not a huge one. And certainly not one for first-time retail traders. The leveraged ETF is better left to more experienced traders who have the time and dedication to use it in addition to other investment vehicles.
Robinhood and the plethora of other low-cost trading platforms have been a huge step forward in making investing more accessible to the masses. But the flip side of that coin is that many people are taking on a huge amount of unnecessary risk.
While it can be tempting to make big, risky bets in hopes of a large payoff, for the average investor, slow and steady growth is the best strategy.
Find Another Way to Buy Gold
If buying gold for protection is your aim, JNUG stock couldn’t be further from the goal. Instead, there are a lot of ways to use gold as a defensive play in your portfolio. SPDR Gold Shares (NYSEARCA:GLD) is an ETF that tracks the performance of gold bullion itself. There are others like the Sprott Gold Miners ETF (NYSEARCA: SGDM) that offer exposure to mining companies.
For those who are interested in taking on a bit more risk (but perhaps not as much as JNUG stock has to offer), there’s the VanEck Vectors Junior Gold Miners ETF (NYSEARCA:GDX).
Laura Hoy has a finance degree from Duquesne University and has been writing about financial markets for the past eight years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, she did not hold a position in any of the aforementioned securities.