Triple Playing

Let’s say you’re certain that the stock market is about to climb dramatically in the next few days — how can you (or the average person) cash in on such a hunch to the greatest extent possible?

Buy stock in some prominent blue chips? You’ll need a lot of cash and some luck to pick the right ones. Buy an S&P 500 index mutual fund? Possibly, though market timing rules may crimp your ability to bounce in and out of the fund. Buy an S&P 500 index ETF? Not a bad idea, but if you’re sure about the spike, how can you win the biggest returns possible from your certainty?

According to John Spence in the W$J, soon you may be able to buy shares in a new crop of highly leveraged ETFs that promise as much as three times the return of the underlying index. So if the SEC grants Direxion’s pending application for its S&P 500 Bull 3X Shares fund, for example, you could gain 3% on every 1% of the S&P’s rise.

Of course, if the S&P happens to fall 2% instead, you’ll lose 6% — that’s the nasty side of leveraging.

And if you really want to roll the dice, you can always buy these shares on margin (as indeed is possible with ETF, though not mutual fund, shares).

So, to what extent does the SEC have the responsiblity to prevent retail investors from fiddling about with impressively volatile investments? Is it the SEC’s job simply to approve all applications containing adequate disclosure or instead to put some sort of cork on the fork?

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2 Responses

  1. 1) You can already buy 2x ETF ‘s(from “Rydex”), and the related market-timing funds been around for a while. It’s not a big deal.

    2) Options

    The horse has already left the barn on this one.

    And there’s far, far, worse things to fool around with than 3x funds. As many found with Internet stocks.

  2. Metal ETF says:

    Just to add to Seth’s comment – the returns won’t be as clean either because of the costs. Usually the leveraged ETFs have higher expenses because of the cost of interest.