Category: INO.com Contributors

Leveraged 3X ETFs Are Much More Dangerous Than You May Think!

Posted on by Matt Thalman

Matt Thalman - INO.com Contributor - ETFs


Due to market demand, over the past few years we have begun to see another increase in investors' use of leverage. Just ten years ago all the rage was using leverage to buy more home than one could really afford. Before that, it was the increased use of credit cards and way back in the late 1920's it was trading stocks on margin. The use of leverage has time and again blown up in the faces of those who use it at an abusive level.

So today I would like to point out some of the dangers of Leveraged ETFs or better known as 3X ETFs. But first, let's talk about why it's hard to see the danger in these investments. I believe the most glaring reason is because we have been told that ETFs, or any group of investments bundled together in order to provide diversity, is safer than buying individual stocks or investments. And that is completely true, but what makes the leveraged ETFs dangerous is the leverage itself.

Deterioration Risk

The first item to consider is what it costs the ETF to gain 3X leverage. That price is often referred to as deterioration risk. The deterioration of invest-able capital is due to the price the ETF must pay other financial institutions to buy and sell investment instruments in order to gain the 3X price movement of the underlying ETF asset. If the ETF is invested in the oil industry for example, the industry itself will have a limited number of financial instruments to invest in, and often times those instruments will have very little liquidity. The lack of supply and lack of demand for the investment therefore pushes the price of the investment higher for the ETF to purchase. In turn, and over time, that increased cost will deteriorate part of the capital being used to invest.

Daily Trading Only

The next issue is the use of leverage and how it makes returns very unpredictable, especially over long periods of time. Direxion Investments is one company who offers leveraged ETFs. On their website, as well as in the profile summary of each of their leveraged ETFs, you can find a warning to investors which reads:

"These leveraged ETFs seek a return that is +300% or -300% of the return of their benchmark index for a single day. The funds should not be expected to provide three times or negative three times the return of the benchmark’s cumulative return for periods greater than a day."

Continue reading "Leveraged 3X ETFs Are Much More Dangerous Than You May Think!" →

Go Nuclear

Posted on by Adam Feik

Adam Feik - INO.com Contributor - Energies


What’s working right now in the energy sector?

I’ll give you 6 ideas in this article.

I track over 100 energy investments in my MarketClub portfolio. My list includes drillers, refiners, shippers, coal, solar, MLPs, and pretty much every other corner of the sector. Today, out of 100+ candidates, only 6 are registering a green Trade Triangle signal for both the long-term and intermediate-term trend. (Green Triangles are a sign of a trend that remains intact and invest-able, although the Triangle system does not purport to capture the exact high or exact low point of any trend).

Here are the 6 diamonds in the rough:

The first two – and this deserves a groan, I admit – are "short" oil funds. I’m not telling you anything you don’t already know to say that oil prices have been plummeting since this summer. As a result, short funds are among the few energy-related investments that have performed well lately... and extremely well, at that. "Short" funds, of course, profit when a market declines, so if you want to bet that oil prices will continue to fall, DDG and DUG continue to display all green Trade Triangles. 


DDG is the ProShares Short Oil & Gas fund, which is designed to deliver one-to-one inverse performance (-1x) compared to oil prices. For a slightly higher-octane version of the same strategy, use DUG, which is the ProShares Ultra-Short Oil & Gas fund. DUG is sold as a -2x, or two-to-one inverse fund. Be advised, both DDG and DUG can be highly volatile, and much of the "easy money" has likely already been made! So keep a sharp eye on either of these investments and/or use tight stop-loss orders.

The next two "in-favor" energy investments are related to uranium. Hence, the title of this article to "go nuclear." Last week, INO.com posted a fantastic interview of Casey Research’s Marin Katusa, author of the new book, The Colder War. In the interview, Katusa touted Uranium Energy Corporation (UEC), which happens to be one of the few energy investments with green Trade Triangles right now. See the interview for some of Katusa’s interesting observations and insights about the company. Caution: Katusa advised being highly selective in the uranium category, and indeed, out of a dozen or so uranium companies on my watchlist, UEC is the only pure uranium play that’s working right now. The second uranium-related investment is not a pure play, but rather a fund that invests mostly utility companies involved in nuclear power generation. The fund is the Market Vectors Uranium + Nuclear Energy ETF (NLR). The fund’s sponsor says the fund’s objective is essentially (paraphrasing) to invest in companies whose long-term strategy is to either derive 50% of their business from uranium or to be substantially involved in nuclear power. Only 2.4% of the fund is invested in companies considered to be part of the energy sector, while over 70% of the fund operates within the utilities sector. While not a pure energy play, NLR does aim to profit from nuclear power, and right now the strategy is working (as evidenced by recent performance). Continue reading "Go Nuclear" →