Unless you have been paying little or no attention to the markets over the past few months, you have probably heard about the Direxion Financial Bull 3X (FAS) and the Direxion Financial Bear 3X (FAZ).
They are part of the new wave of leveraged ETFs, which attempt to provide two or three times the return of normal ETFs. While the idea may be great, the execution is likely flawed. Let’s look at why. Here’s a chart of the underlying index that the FAZ and FAS are based on, the Russell 1000 Financial Services Index.
As you can see, the index bottomed out in early March and has risen steadily since then. Let’s look at the FAS, which is intended to provide 3x the daily performance of the $RIFIN.
Looks a little underwhelming, doesn’t it? While volume has spiked incredibly since January of this past year, you can see the return hasn’t even come close to matching the $RIFIN.
Look at the $RIFIN chart. In November 2008 the index was trading around the 650 level. It has recently climbed back up to the same level.
The FAS by contrast, was around 40 in November of 2008, yet has only climbed back up to the 10 level since bottoming out in March. So much for providing 3x the return.
The same goes for the FAZ, which is intended to provide 3x the inverse move of the $RIFIN. Volume spiked in mid-April of this year. Since the $RIFIN bottomed out in March, the FAZ has been beaten down badly since then. But it has virtually flat-lined. It hasn’t moved anywhere, let alone 3x the inverse of the $RIFIN.
As you can see, both the FAS and the FAZ are both slowly headed to zero. I have done some poking around on the internet, and there seems to be a growing consensus that both the FAZ and the FAS will by their composition eventually both be zero. Without getting too technical, it has to do with the instruments they use to achieve the leverage and that each one resets on a daily basis.
So, if this is the case, what can you do to profit from it?
Short them.
If you look at the combined entry cost since inception, you could have made a tidy profit in a short time period.
Short both the FAZ and the FAS on a monthly basis. But you must enter the short in equal dollar amounts, not equal shares (this wouldn’t provide equal weighting). We aren’t trying to predict which side will fall, only that both sides will eventually.
Respectfully,
Christian Hill
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i,m just a dumb investor , but it looks like the RIFIN is up 80-100 % ,while the FAS is up 2-300% since mar. , also the FAZ is down 90 -100 % ,,?? seems like they did what they r supposed 2 do ,,maybe i should re-take math ,,,,,,,,,,
FAS up 400% while RIFIN not even 50%. Same as Keith, what kind of calculator are they using??
Hey Keith and Scott,
Thanks for writing in. I went back and looked at the numbers over a 3 month period, from March 9th to June 9th. The RIFIN went from 391.96 to 659.13, or an increase of 68.16% if my numbers are correct. By expectations, the FAS should be up around 204% (3x 68%), however the FAS has gone from 2.70 on 3/9 to 10.63 on 6/9. My quick math has that around a 293% increase. The FAZ has gone from 99.17 on 3/9 to 4.34 on 6/9. I have that as a 95% drop.
March 10th is a good comparison as well. That day, the RIFIN went up by approximately 13.75%. One would expect the FAS to have gone up by 41.25% (3x), but it closed up 38.15%. The FAZ should have been down 41.25% (3x) but it closed down 37.99%.
I don’t know the exact reasons why. It is well beyond my comprehension level. The point I was trying to make is that these leveraged funds aren’t providing the true leverage they claim to, as the actual results vary.
Thanks Christian, you are the first I have seen writing on this. I have had both at times and presently remain with FAZ but on the verge of taking a loss though I’ve kept waiting for the financials to fall.