The following is in response to Tom Lydon’s article, In Defense of Leveraged and Inverse ETFs, which appeared last week:
Dear Editor,
In his recent article, Tom Lydon shares many well-founded insights. This letter concerns Lydon’s statement that the regulatory authorities should not impose limits or consider doing away with these innovative and immensely popular products because “investors…are a smart, educated, affluent bunch. It is up to the investor to acquire the education and information they need to move forward." Lydon claimed that thousands of investors and financial advisors have used leveraged and inverse ETFs with success.
We strongly disagree with Lydon on this issue. In our opinion, leveraged and inverse ETFs are not aspirins to be sold over the counter; instead, they are prescription drugs that may cause serious adverse effects and thus warrant a black-box warning.
Let's take a look at some of the most popular leveraged and inverse ETFs:
Name |
Ticker |
Inception Date |
Fund Size as of 9/30/09 (millions) |
Net Inflows |
Direxion Daily Financial Bear 3X Shares |
FAZ |
11/6/2008 |
$1,176 |
$1,878 |
UltraShort S&P500 ProShares |
SDS |
7/11/2006 |
$3,442 |
$1,769 |
UltraShort QQQ ProShares |
QID |
7/11/2006 |
$1,049 |
$413 |
Source: Morningstar
UltraShort S&P500 ProShares (SDS) and UltraShort QQQ ProShares (QID) have been around for just over three years, while Direxion Daily Financial Bear 3X Shares (FAZ) is yet to reach its one-year anniversary. However, these funds have been “immensely popular” and quickly joined the club of “billion dollar funds” over the past few years. In the month of April 2009 alone, $2.3 billion flooded into Direxion Daily Financial Bear 3X Shares and $1.8 billion flew into UltraShort S&P500 ProShares.
These funds were not just popular – they were sizzling!
However, have investors and financial advisors used them with success? Let's review these funds' recent performance and their investors' returns.
| Name | Ticker |
Total Return YTD* |
Total Return 1 Year |
Investor Return 1 Year |
| Direxion Daily Financial Bear 3X Shares | FAZ | -94.12% | ||
| Russell 1000 Financial Services PR USD | 19.82% | |||
| UltraShort S&P500 ProShares | SDS | -42.90% | -33.08% | -45.27% |
| S&P 500 TR | SPYZ | 19.26% | -6.91% | |
| UltraShort QQQ ProShares | QID | -59.83% | -50.50% | -50.71% |
| NASDAQ 100 TR USD | IXNDX | 42.65% | 8.60% |
Source: Morningstar
Data as of 9/30/09. See footnote 1.
*Note: returns are not annualized
1 Index performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index. Past performance is not a guarantee of future results.
