Uncertainty Strikes FAS

Bill Luby  Jul 01, 2009 10:45 am

Uncertainty Strikes FAS
 
Tracking error aside, FAS is now effectively the ghost of XLF.
 

 
For someone who gets a kick out of volatility, the arrival of triple ETFs has been a little bit like manna from heaven. Of course, the launch of the Direxion triple ETFs back in early November just happened to coincide with the highest VIX readings in history. There's nothing like record volatility -- except perhaps record volatility times 3.

As I noted then:

"Direxion is the first company to offer ETFs that have a targeted return which is leveraged to 3 times and minus 3 times that of the underlying indices. So far, the biggest successes have been the large cap 3x bull (BGU) and large cap -3x bear (BGZ) ETFs, which are based on the Russell 1000. Also proving popular are the small cap 3x bull (TNA) and small cap -3x bear (TZA) ETFs, which follow the Russell 2000."

But a lot's changed since November. The VIX traded in the 80s the month it was launched; today it was as low as 25.02. At the moment, the VIX is exactly one-third as high as it was when it peaked in November at 81.38. For those who've been selling options, the ride down the volatility slide has been an unusually profitable one. In fact, it's likely that some of the premiums harvested in the last 9 months or so will turn out to be the most bloated we'll see in our trading lifetimes.

My personal interest in the triple ETFs notwithstanding, these vehicles have received mixed reviews, largely because their suitability as buy-and-hold investments degrades rapidly after just one trading session -- with the problems exacerbated by increases in volatility.

On the flip side, the recent decrease in volatility has muted some of the tracking and compounding errors inherent in leveraged ETFs. In fact, in the current environment, the 3x and -3x ETFs are starting to look somewhat tame relative to their history.
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Comments (2) See All Comments »
07-01-2009, 11:16 am
I'd have to suggest that the overall volatility of these products should be very similar to the underlying indicies that they track - and that historical volatility abberations were a function of poor tracking error.

The right st
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07-01-2009, 11:52 am
I'm wrong. Something didnt feel right after I posted that, so I ran the numbers. Pls disregard.
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