Skip to Content
ETF Specialist

3x Leveraged ETFs Throw Rocket Fuel on the Fire

These ETFs are designed for sophisticated investors and should come with a warning label.

Mentioned: , , , , , ,

Market-timers rejoice! Today, Boston-based Direxion officially launched the first group of exchange-traded funds that offer triple leverage, or 300% exposure to market indexes to make bullish or bearish bets. With excessive financial leverage at the heart of the current credit crises, the timing of this launch may surprise some. Over the past several months market participants have experienced unprecedented levels of volatility. With a dynamic regulatory environment, blitzes of weak economic data, credit markets that have yet to fully thaw, and uncertainty surrounding the new administration, it seems as though volatility may remain for some time. For investors looking to magnify market returns with these aggressive products, we can offer some simple advice: Hold on to your hats.

In all seriousness, we do think that these 300% leveraged ETFs can be powerful and effective tools to speculate on the market's daily movements--if used properly. However, they can also be very detrimental to an investor's financial health if used without caution. In our view, these products should be viewed as hedging and speculation tools that are better suited for use by professional investors. For instance, an institutional investor seeking to hedge his exposure to oil could theoretically do so by using one third of the capital. The investor could then deploy the extra capital afforded to him by the 300% in other investment opportunities. The leveraged inverse ETFs can make sense from a risk management perspective as well: An investor can't lose more than his or her initial investment with these products, while in a traditional short position one would theoretically be exposed to unlimited losses.

John Gabriel has a position in the following securities mentioned above: BRK.B. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.