How Leveraged ETFs Work

I’ve pointed out from time to time that ETFs, especially leveraged ETFs, don’t work the way many investors expect or think they will. Another example of that is the performance of some leveraged natural gas ETFs from Direxion. With index funds, investors generally are used to the idea that their returns won’t exactly match an index because of trading expenses, management fees, slight mismatches with the published index and other factors. But they expect the differences to be very small. With leveraged ETFs, you can be correct about the direction of an investment or market and still lose money, especially if you hold an ETF for an extended period. I tried using leveraged mutual funds and ETFs in my Invest with the Winners Strategy in Retirement Watch and found they don’t work well. Leveraged ETFs are for traders, especially those who hold the ETFs for a very short time.

From its inception (about two years ago) GASX is down 38.5%. The negative 3x the natural gas index (which is what the ETF is supposed to be tracking) is up 17% for the same period. If you bet against natural gas companies 2 years ago, you would have been right, but this ETF would have lost you close to 40%. Ouch.

What makes this even more interesting is that its twin, GASL, the 3x long natural gas index ETF is is also down for that same period – a whopping 48%.