Copied from my Motley Fool CAPS blog:
Say on Friday you were thinking IYR (the Real Estate Index) and XLF (the Financial Index) were headed lower.
IYR was trading at $33 at this time.
XLF was trading at $11 at this time.
You wanted to short these indexes but you did not want to use options or short common to do it.
You find that there is an index FAZ that is “triple short” the XLF and an index SRS that is “double short” the IYR.
Say you bought SRS on Friday at $26 and FAZ at $9 (the prices that correspond to the levels on IYR and XLF above.
If you didn’t watch the market on Monday you would check IYR and XLF on Tuesday:
You would see that the IYR was off from $33 down to $31.4 or a 7.8% decline.
You would see that XLF was off from $11 down to $10.60 or a 3.6% decline.
If you didn’t know any better you would think. “Since I am double short IYR and triple short XLF, I should be up over 10% on FAZ and over 15% on SRS, I am so smart.. where will I spend all the money”
In reality SRS closed at 27.2 and FAZ closed at 9.15. So you would have only made 4.6% on SRS and a pathetic 1.5% on FAZ…
Really even though you are supposedly “double” and “triple” short these underlying indexes you actually didn’t even MATCH the 2 day decline in these things, not even close to matching the declines actually...
This is because in order for you to make money, not only do the indexes have to fall, but they have to fall EVERY SINGLE DAY. On the triple indexes a one day, 20% plunge is almost completely negated by a 10% bounce the next day. The double and triple indexes have one huge enemy, math.
I understand this fact which is why I created the Ultrasuck portfolio in CAPS to track the destruction of these ETF’s over time, but that being said…. Even though I understand it, it still pisses me off when I finally try to buy these silly wealth destroyers to hold for a few days…
What people buying these things need to understand is if the path of the last two days continues in the same way: (market down huge on day 1, market up half as much as the day before on day 2), these ETF’s will only be up marginally and the underlying indexes will be ZERO...
So you will have successfully shorted Financials and Real Estate to zero and will have nothing to show for it except for a sob story about how Direxion ripped you off!
Rant over….
PS: I am still holding some SRS and FAZ, but I am not happy about it....
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I am too chicken, I think, to hold these 3x any longer than a few days, or maybe even overnight. They are rediculous day trading vehicles, but for "swing trades" of greater than a day I think they are too volatile.
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