This Leveraged ETF Has Doubled This Month

The primary allure of leveraged exchange traded funds is the potential for traders to capture out-sized gains in rapid fashion.

Leveraged ETFs are designed to deliver double or triple the daily or daily inverse performances of particular indexes. As such, these funds are not designed to be held for more than a few days, but some traders do that and profit or peril from those trades.

What Happened

Adding leverage to the already volatile oil patch can be dangerous or rewarding. For bearish traders, the combination of leveraged and oil equities is proving rewarding this month. The Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares DRIP proves as much.

DRIP is designed to deliver triple the daily inverse returns of the S&P Oil & Gas Exploration & Production Select Industry Index (SPSIOPTR), an equal-weight benchmark comprised of oil and natural gas exploration and production companies.

Why It's Important

Oil prices are sliding and the energy sector has rapidly attained the dubious distinctions of being in a bear market while also being the worst-performing group in the S&P 500 this year. Entering Thursday, DRIP was sporting a month-to-date gain of almost 90 percent, easily making it the best-performing bearish fund in Direxion's stable.

On above-average volume, DRIP surged more than 11 percent yesterday, meaning the fund has more than doubled on a month-to-date basis. Three of Direxion's top five leveraged inverse ETFs in December, a group including DRIP, are energy equity plays.

That sounds nice and it is, but that does not mean a free lunch exists with DRIP. Over the past month, only one of Direxion's inverse leveraged ETFs has been more volatile than DRIP, reminding traders that leveraged ETFs, bullish or bearish, or not built to be held for long holding periods.

What's Next

Traders are exercising some prudence with DRIP. For the 10-day period ended Wednesday, Dec. 19, only one of Direxions's inverse leveraged ETFs saw larger outflows as a percentage of assets under management than did DRIP.

That is good, but issuer data suggest some of that money may be flowing into DRIP's bullish (and battered) counterpart, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares GUSH. All GUSH has done on a month-to-date basis is lose about 63 percent.

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