At some point or another, all investors come across the concept of leveraged exchange-traded fund. With this platform, you can gamble with a higher magnitude toward sectors you have much confidence in. And in this context, the Direxion Daily Jr. Gold Miners Bull 2X ETF (NYSEARCA:JNUG) is especially intriguing. As you know, gold is a hot commodity, perhaps the hottest. So, why wouldn’t you buy the JNUG ETF?
As I explained in late May, the JNUG ETF isn’t what you think it is. Of course, you can enjoy a huge windfall by placing leveraged wagers on the yellow metal. Additionally, these funds have a structural advantage in that you don’t have to worry about educating yourself on options, which is how most professional traders “double” down, colloquially speaking.
In this sense, the JNUG ETF is just like buying a stock. Except, as I argue, it’s not. A few months back, I mentioned:
Bluntly speaking, leveraged ETFs are terribly deceptive. Initially, rookie investors may assume that “2x” means twice the performance of the benchmark index the fund is tracking. But because leveraged funds have exorbitantly high expense ratios and are constantly being rebalanced, they erode value over time.
According to the Direxion website, the JNUG ETF has an expense ratio of 1.12. According to the Wall Street Journal, the average ETF “carries an expense ratio of 0.44%.” That’s a stratospheric difference. Additionally, I mention other factors that should dissuade most investors from leveraged ETFs. At the end of the day, they’re not investments at all.
However, if you’ve read and signed the waiver, and you still want to dive in, you may benefit from FUD: fear, uncertainty and doubt.
The Fear Factor Is Huge for the JNUG ETF
Historically, gold has performed well during periods of extended or extreme fear. Of course, there’s a lot of this negative emotion circling around these days.
At first, many people freaked out over the novel coronavirus. Suddenly, a mysterious virus that was infecting and killing people in China made it to our shores. As daily infections skyrocketed, along with crippling hospitalizations in places like New York City, Americans hunkered down.
But as we grew accustomed to our new normal, another fearful catalyst struck us: social breakdown and chaos. Frankly, you could see that this was going to happen in a broader scale. Initially, racism against Asian Americans soared due to the scapegoating mentality. Later, as millions of Americans lost their jobs, along with terrible instances of police brutality, the lid simply blew.
Even today, the chaos in Portland, along with brazen acts of violence in Chicago and major cities throughout the U.S. stem from weeks of riots and unrest. For most everyday Americans, it’s a frightful situation with no easy answers.
Lost in this discussion, though, is how the men and women in law enforcement feel. Without reservation, most police officers are good people. So, when large groups of people turn against them for crimes they didn’t commit, morale plummets. Worryingly, we may have problems in the future recruiting police officers.
Not surprisingly, gun sales have skyrocketed to all-time highs. I don’t expect that to abate anytime soon. Usually, guns and gold demand go together, which is a significant factor to consider for the JNUG ETF.
Uncertainty Is the Only Certainty There Is
As you might guess, support for President Trump is hard to find these days. Even less so are public and vocal supporters of the Commander-in-Chief. All you need to do is to look at the latest opinion polls to understand the deep political divide.
Now, I’m not one of those types to pigeonhole myself into one political identity or another. In fact, I frustrate most people who have strongly held ideological views. I like my politics complex and nuanced.
That said, I believe that mainstream criticisms of President Trump’s coronavirus response was heavily flawed from the beginning. While I applaud him for taking swift action against incoming travel from China, he should have taken the pandemic seriously.
Again, let’s give credit where it’s due – Trump seems to have changed his tune recently. However, it seems like a case of too little, too late. I would have loved to have seen this leadership months ago.
Thus, it appears that former Vice President Joe Biden will become our next President. Invariably, this will please liberals to no end. But it will end because huge question marks surround Biden. According to a Rasmussen poll, “Nearly four-out-of-10 voters believe Joe Biden has dementia.”
Say what you want about Trump – the man is a decision-maker. They may not be the right decisions, but Americans are attracted to his confidence. And please don’t read into this too deeply. But if I had a choice, I prefer someone who’s been at the helm to guide us through this mess rather than betting on an unknown.
But that unknown could very well be our certainty. And that certainly bodes well for the JNUG ETF.
A Cloud of Doubt
As millions of workers continue to file jobless claims, the math regarding an economic recovery appears very slim. If this situation worsens, we could see turmoil that is unprecedented in U.S. history.
Specifically, I’m worried about eviction rates that could hit us like a freight train. Moreover, the Washington Post notes that Black renters could be the hardest hit. By any measure, that would incense this population, hurtling us toward unimaginable depths of bedlam.
And when I watch the proceedings in Washington, I can’t help but boil in rage. Here they are, with their thousand-dollar suits, taxpayer-derived per diem benefits and outrageous salaries, and they can’t get together to save America.
I don’t understand this talk about deficits and the rising national debt. Sure, they are problems. But if we have millions of homeless people because of this crisis, we will incur an existential crisis right now.
Unfortunately, we’re in a situation where each political party is so fixated on advancing their agendas that they could care less – or don’t notice – that our nation is bleeding out. Sure, the stock market is doing well but as we know, that could change in a hurry.
Essentially, real Americans doubt that our political leaders can get us out of this mess. This is one of the core reasons why folks are taking matters into their own hands (i.e. gun sales). At the same time, this dynamic is a very robust catalyst for gold, which could help lift the JNUG ETF.
Perhaps the biggest catalyst for precious metals is the recent escalation in U.S.-China tensions. On Wednesday, the federal government ordered China to close its consulate in Houston, Texas by Friday.
Several conservatives celebrated the move as a necessary measure to stop Chinese espionage. But naturally, it raises the stakes in the most pivotal of geopolitical relationships. As well, the Chinese don’t like losing face. Therefore, its governmental response could be painful, exacerbating our already unprecedented crisis.
Obviously, this chaotic event potentially provides upside for the JNUG ETF. But I want to warn you again: leveraged ETFs don’t always respond rationally. Therefore, you could find yourself being right on the headlines and wrong where it matters.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he is long gold.