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Duration: 3:11

Contributor: Direxion

Level: Intermediate

This Lesson describes the impact of holding a Daily 3x Leveraged Bull fund for a period of a week when the markets are declining steadily.

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Study Notes:

It’s a Sunday night and Jill believes the markets will swing upwards tomorrow. On Monday morning she buys $100 dollars of a daily 3x leveraged bull ETF for a total of $300 dollars of market exposure.

Unfortunately for Jill, her prediction is wrong, and her ETFs benchmark index declines 5% from 100 to 95 points. Her daily 3x leveraged bull ETF returns 300% of that loss for a total of a 15 percent decline. Her ETF is now worth just $85 which means that Jill will start Tuesday with just $255 dollars of exposure to the market. At this point a prudent investor might decide to cut their losses and exit their position. But for explanatory purposes we’ll continue.

On Tuesday the index declines from 95 to 90, a 5.26 percent decline and Jill’s ETF falls another 15.78 percent to $71.58 cents. On Wednesday the index goes down to 85; an additional 5.56 percent loss and Jill’s ETF declines to $59.65 cents for a total exposure of $178.95. On Thursday the index declines again by 5.88% and Jill’s ETF goes down another 17.64 percent to $49.12 cents for an exposure of $147.36 cents.

Finally, on Friday the index drops to 75; an additional decline of 6.25 percent and Jill’s ETF again drops 18.75 percent. At the end of the week with five consecutive days of five-point declines in the benchmark index, Jill’s ETF is worth $39.91 cents and her total exposure is just $119.74 cents.

All told the benchmark index experienced a total decline of 25 percent for the week. The daily rebalance has reduced exposure each day and subsequent unfavorable index moves have created positive compounding. Jill’s investments still declined significantly at negative 60.09 percent, but not as much as three times the cumulative return of the index, negative 75 percent.

Each day as part of the rebalancing process the fund pulled a portion of the assets out of the market to ensure that the fund’s market exposure equals three times the fund’s assets. The end result of this process is that Jill ended up losing less than she would have if the fund was not rebalanced each day.

To learn more about Direxion’s leveraged ETFs please visit www.DirexionInvestments.com.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Academy that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Academy are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Direxion and is being posted with permission from Direxion. The views expressed in this material are solely those of the author and/or Direxion and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Stock Symbols

Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

Disclosure: Leverage ETFs

Complex or Leveraged Exchange-Traded Products are complicated instruments that should only be used by sophisticated investors who fully understand the terms, investment strategy, and risks associated with the products.  Learn more about the risks here: https://gdcdyn.interactivebrokers.com/Universal/servlet/Registration_v2.formSampleView?formdb=4155

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