With 2012 drawing to a close in a matter of hours, it is fair to say it has been another wild, volatile and perhaps disappointing year for leveraged ETFs.
Wild and volatile because, and this is no surprise, some of the best-performing ETFs on a percentage basis this year are leveraged funds.
Disappointing because many leveraged funds continue to confound investors that hold these products for extended time frames. For example, the iShares Dow Jones U.S. Financial Sector Index Fund (IYF), not a leveraged ETF, is up 22.6 percent this year. Presumably, that means the ProShares UltraShort Financials (SKF), the double-leveraged inverse equivalent of IYF, is down 45.2 percent, right?
Wrong. SKF is off "just" 42 percent, which may be a slight disappointment for those that had fortitude to short that product in January and ride that short all year. To be sure, that strategy should not be employed by all investors. However, use of leveraged ETFs as short-term trades , not long-term investments, will continue to work in 2013. Here are 10 such funds to consider in the new year.
Direxion Daily Gold Miners Bear 3X Shares (DUST) This list is no particular order, but if it was in order of preference, DUST might just appear in the top spot. The reason being is that gold mining stocks and ETFs continue to struggle relative to bullion. Making matters worse is the fact this is becoming a long-running theme.
DUST proves the aforementioned point about the importance of not making leveraged ETFs investments. In 2012, the Market Vectors Gold Miners ETF (GDX) has lost 11.6 percent, but DUST is far worse with a loss of 21.3 percent. Do things the right way and view DUST as a short-term trade and one will see this ETF has surged eight percent in the past month while GDX has tumbled 9.6 percent.
Bullish alternative: Direxion Daily Gold Miners Bull 3X Shares (NUGT).
Direxion Daily Financial Bull 3X Shares (FAS) The infamous FAS has surged 78.2 percent this year. An impressive run to be sure, but investors could have done a lot better by simply buying shares of Bank of America (BAC) in January and holding that stake the entire year. Dow component BofA has more than doubled this year.
Well, that is hindsight and investors are now wondering if FAS can offer a sequel to its 2012 heroics in 2013. It is possible. Financials are slightly cheaper than the broader market as the Financial Services Select SPDR (XLF) has a P/E ratio below that of the SPDR S&P 500 (NYSE: SPY).
A catalyst(s) for FAS could arrive in the first half of 2013 if regulators allow BofA and Citigroup (C) to boost dividends and engage in much needed share repurchase programs.
Bearish alternative: Direxion Daily Financial Bear 3X Shares (FAZ).
ProShares UltraShort Oil & Gas (DUG) Here is another example of the dangers of holding a leveraged ETF over the course of a year. The index DUG is designed to deliver two times the daily inverse performance of the same index tracked by the iShares Dow Jones U.S. Energy Sector Index Fund (IYE). That ETF is up about 0.7 percent this year, but DUG has lost almost 15 percent. As is the case with DUST, there have been stretches of time where DUG has proven to be one of the better energy ETFs, though it is important to note those stretches do not last 10 or 12 months.
Amid faltering production, integrated oil names could be in for another mediocre year in 2013, implying DUG is worth keeping an eye on.
Bullish alternative: ProShares Ultra Oil & Gas (DIG).
Direxion Daily Technology 3X Bear Shares (NYSE: TECS) It is not hyperbole to say tons of market participants are concerned about Apple (AAPL). The largest U.S. company by market value traded over $700 in October, but appears destined to close the year below $530.
Apple accounts for 17.2 percent of the Technology Select Sector SPDR (XLK), the ETF that tracks the same index TECS is designed to deliver three times the daily inverse performance of. When properly applied, TECS is useful either for those looking to profit from an Apple decline without having to incur the risks of shorting the stock directly, or the limitations of the options market. Additionally, since TECS trades for less than $10, those that are long Apple or XLK, can use TECS as an occasional hedge.
Bullish alternative: Direxion Daily Technology 3X Bull Shares (NYSE: TECL).
ProShares UltraShort Yen (YCS) Of all the ETFs mentioned on this list, YCS may come with the most simple, obvious reasoning. The yen will close 2012 as the worst-performing developed market currency. Newly elected Japanese Prime Minister Shinzo Abe has pledged to pressure the Bank of Japan to engage in unlimited monetary easing and target two percent inflation.
At this juncture, it appears BoJ will acquiesce to Abe's demands. It is either that or risk losing its independence.
Bullish alternative: ProShares Ultra Yen (YCL).
Direxion Daily Small Cap Bull 3X Shares (TNA) Small-caps have held up quite well in an environment made challenging by politicians' inability to solve the fiscal cliff. The iShares Russell 2000 Index Fund (IWM) has gained 1.7 percent in the past month compared to a loss 0.8 percent for the SPDR S&P 500 (SPY).
That could be a promising sign regarding the chances of a January Effect, the scenario under which small-caps leader a broader market rally to start the new year. If small-caps do become a leadership group in the first quarter, then the Direxion Daily Small Cap Bull 3X Shares becomes useful as a short-term trade.
Bearish alternative: Direxion Daily Small Cap Bear 3X Shares (TZA).
ProShares Ultra FTSE China 25 (XPP)To its credit, the ProShares Ultra FTSE China 25 has not deviated too far from double the returns of its unleveraged equivalent, that being the iShares FTSE China 25 Index Fund (FXI). Year-to-date, over the past six months, 90 days and 30 days, XPP has offered just over double the returns of FXI.
That should not change the fact that leveraged ETFs are not intended to be held all year. However, with Chinese equities and plain vanilla China ETFs closing 2012 in strong fashion, XPP merits consideration for the year ahead.
Investors should note that XPP sharply outperformed the Direxion Daily China Bull 3X ETF (YINN) in 2012. The two track different indexes and that likely explains the difference. Both funds are highly risky, but if one can grab better returns with a double-leveraged ETF over a similar triple-leveraged product, that is a deal that should be taken.
Bearish alternative: ProShares UltraShort FTSE China 25 (FXP).
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