Market Overview

YINN To My YANG: What's Up With Leveraged Chinese ETFs?


No one ever said leveraged ETFs are perfect. And let's be honest: Leveraged ETFs are perhaps the most derided financial instrument to come along in years. These things make credit default swaps and other complex derivatives look like the most well-behaved kids in class.

The bottom line with leveraged ETFs is most folks love them or hate them. There is really "in between" regarding sentiment toward these products.

An interesting situation can be spotted today that might give leveraged ETF haters a little more ammo for their argument and keep investors that have been curious about these funds away. Just check out China ETFs.

At this writing, the iShares FTSE China 25 Index Fund (NYSE: FXI), the largest China ETF on the market, is down about 1%. As such, it's reasonable to expect the ProShares UltraShort FTSE China 25 (NYSE: FXP) would be up almost 2%, which it is. It would also be fair to expect the ProShares Ultra FTSE China 25 (NYSE: XPP), FXP's bull cousin, to be down 2%. And it is.

So everything is kosher there, but add to the leverage and things get interesting, at least on this particular day. The Direxion Daily China Bear 3X Shares (NYSE: YANG) is DOWN nearly 3% today. That's right, no need for a double take. The Direxion Daily China Bear 3X Shares is down.

Making matters even more interesting is the fact that YANG's bull equivalent, the Direxion Daily China Bull 3X Shares (NYSE: YINN) is UP today. Up almost 3% as a matter of fact.

Yes, the ProShares and Direxion funds track different indexes and that might explain some of the performance gap today. However, discrepancies such as a bullish leveraged China ETF going up when the biggest plain vanilla China ETF is down and at healthy percentages no less, probably doesn't do much to help endear leveraged ETFs to the masses.

Maybe it's a one-day anomaly. Even it is just that, this is one of those situations that underscores the risks involved with leveraged ETFs. Remember, these are DAILY instruments, good for periodic hedging and short-term trades, but by no means should they become core long-term portfolio holdings.


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