There's nothing wrong with most exchange-traded funds. ETFs typically provide indexed exposure to marketplace segments in real time -- something you don't get from the more traditional open-ended mutual fund.
However, we're starting to have a problem with a few ETFs on steroids, including Direxion Daily Financial Bull 3x Shares (NYSE: FAS), ProShares Ultra Financials (NYSE: UYG), Direxion Daily Financial Bear 3x Shares (NYSE: FAZ), and ProShares UltraShort Financials (NYSE: SKF), which offer greater exposure to the financial-services sector.
The 3x Direxion funds strive to replicate a move that is 300% of what happens with the financial-services stocks within the Russell 1000. The ProShares Ultra vehicles may seem comparatively tame in offering just a 200% kick off the Dow Jones U.S. Financials index.
Then again, we're also talking about the banking sector, which is volatile enough on its own. Have you seen the stock charts on leaders and bleeders like Bank of America (NYSE: BAC) and Citigroup (NYSE: C)?
Buying into the financial-services sector these days is like riding a mechanical bull on its roughest setting. Buying into one of the Direxion funds is like riding the same mechanical bull during an earthquake. It's a wilder ride, but take the time to notice the rubble around you.
The failure of Direxion's controversial 3x funds should be evident right now, as both the bear and bull funds executed reverse splits this morning. The bullish wager on the financial space went through a 1-for-5 reverse split. Its bearish counterpart had to go through a more humiliating 1-for-10 reverse split.
Think about that for a moment. These are both reverse splits, financial rescues for stock prices that have fallen to low levels. This isn't a 1-for-5 reverse split on one vehicle, offset by a more conventional 5-for-1 split on the other. Both ETFs have failed, and that is problematic for fans of these concentrated ETFs and, obviously, for the companies managing them.
It's not a surprise to see regulators shaking their heads. These funds may perform as expected for a day or two, but they are proving to be compounding nightmares for anyone banking on these ETFs for longer than that.
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