ETF Talk: Unveiling Triple Leveraged Treasuries

Since World War I, buying U.S. Treasury bonds has been one of the surest, safest and most popular bets an investor could make. In almost every recession, as stocks fall, shrewd investors turn to the safety and security of U.S. government backed T-bills. The current recession has been no exception.

T-bills and gold were the only two sectors that ended 2008 with a profit. Long-term Treasuries returned an astonishing 27.1% last year, with short-term Treasuries growing an impressive 4.7%. With the markets as volatile as ever, Treasuries have been a safe bet so far. With those returns, you might be tempted to add them to your portfolio through an exchange-traded fund (ETF). In fact, a bond ETF I recommended for my High Monthly Income service has yielded strong dividends and is up about 8% since my buy signal.

This week, I wanted to introduce you to the Direxion Funds family’s four new, triple-leveraged ETFs that go either long or short on 10- to 30-year Treasury bonds. That means that these new ETFs return 300% of the daily long, or short, return of the NYSE current 10- and 30-year bond indexes.

Investors interested in trading these ETFs should realize that they are meant for short-term holding only. To gain an appreciation for the volatility of these funds, look at the chart below of the benchmark NYSE Current 10 Year US Treasury (^AXTEN), which offers a comparison with the Direxion Daily 10-Year Treasury Bull 3x Shares (TYD). In five days of trading, a long position through TYD would have resulted in a 5% loss.

On the other hand, shorting 10-year T-bills through the Direxion Daily 10-Year Treasury Bear 3X Shares (TYO) would have netted a short-term profit.

My son David recently told Investor’s Business Daily, "because of the complex underlying derivatives and compounding effects, these indexes will be susceptible to tracking error over longer periods of time." Over longer periods of time, not only will the market’s volatility hurt your chances of making a profit with these heavily leveraged funds, but the accuracy in the tracking of these ETFs themselves will be affected as well.

These funds are going to be effective for traders when prices or yields reach extremes.

The table below lists Direxion’s new ETFs.

As always, I am happy to answer any questions you may have about ETFs. To send a question for me to answer in a future ETF Talk, please click here.