These Leveraged ETFs Could be Worth The Risk
Leveraged ETFs, whether they be the double- or triple-leveraged, bullish, or bearish funds, are risky instruments that are best used as short-term trading vehicles. That much is widely known. Put the term “leveraged ETF criticism” into Google and sit back as almost 68,000 results are returned in three tenths of a second.
These ETFs have been criticized to levels that no longer add value. In fact some critics are so misinformed that they have implied the recently announced closure of two leveraged ETFs by one particular issuer is a sign of things to come.
Here is the reality: Leveraged ETFs are not for everyone. Issuer web sites say as much and anyone opting to ignore the abundant warnings surrounding this ETF sub-segment is likely headed for heartache.
Reality part two: Proper use of leveraged ETFs can result in quick profits for agile traders and the following funds could be worth the risk if global macro headwinds persist.
ProShares UltraShort MSCI Brazil (NYSE: BZQ)
The ProShares UltraShort MSCI Brazil is the double-leveraged equivalent of the iShares MSCI Brazil Capped Index Fund (NYSE: EWZ). EWZ may be the largest Brazil ETF on the market, but it is also a fund that has a hard time staying out of its own way.
Earlier this month, EWZ perked up after finally getting some help from downtrodden Petrobras (NYSE: PBR). Well, in further proof that if it is not one thing it is another for EWZ, Vale (NYSE: VALE) is a real thorn in EWZ’s side.
Vale, the world’s largest iron ore producer, accounts for almost 10 percent of EWZ’s weight. That is not a good thing when shares of Vale are off almost 12.5 percent in the past month and are getting toasted on lingering concerns about the Chinese economy.
On a technical basis, EWZ has been rebuffed around $57.50 several times this year and could be vulnerable on a close below $55. Conversely, BZQ is starting to creep above resistance at $65. A new breakout for the bearish play could follow.
Direxion Daily Russia Bear 3X Shares (NYSE: RUSS)
The Direxion Daily Russia Bear 3X Shares represents a particularly risky trade and not just because this is triple-leveraged play. For starters, RUSS has surged almost 16 percent in the past five days as long Russia ETFs have tumble on the back of the Cyprus headlines. That gain could imply RUSS is overbought here.
Second, further declines in Russian equities enhance the case that these stocks are attractively valued. If buyers take the valuation bait, RUSS could tumble just as rapidly as it has climbed.
Living in the here and now, RUSS does hold some promise for active traders if Cyprus remains a problem. The key is realizing a 10 percent gain in two day or 16 percent in five days is impressive, taking profits from there and not being too greedy.
ProShares UltraShort Basic Materials (NYSE: SMN)
Even with a year-to-date gain of over five percent, the Materials Select Sector SPDR (NYSE: XLB) is proving to be a laggard among the nine sector SPDRs ETFs. That said, traders should note the ProShares UltraShort Basic Materials does not track the same index as XLB. Rather, SMN seeks to deliver twice the daily inverse returns of the index tracked by the iShares Dow Jones U.S. Basic Materials Sector Index Fund (NYSE: IYM).
While global materials names such as BHP Billiton (NYSE: BHP) and Vale have recently been worse performers than many of IYM’s holdings, some of the ETF’s marquee constituents are starting to show signs of weakness. In the past week, DuPont (NYSE: DD) and Dow Chemical (NYSE: DOW) are each down more than 0.7 percent while Freeport McMoRan (NYSE: FCX) is off more than two percent. Those three stocks combine for over 24 percent of IYM’s weight.
Losses for IYM could really accelerate if the ETF violates support at $69 while SMN becomes all the more alluring as a quick-strike trade above $52.
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