Let’s get this straight: I don’t want to bash any ETF issuer. I want to bash the idea that investors need to chase leverage – and that they need even more new tools to do that.
In my experience, this phenomenon is what drives events like Thursday’s new launch from Direxion, a pioneer of issuing funds that help individual investors act more like traders.
For active traders, Direxion added to its line of leveraged and inverse tools this week, introducing four new 2x leveraged ETFs that aim to deliver 2x the daily return of an individual stock. Added to the roster, and to the market’s overwhelming number of these types of ETFs:
- Direxion Daily ASML Bull 2X ETF (ASMU)
- Direxion Daily BABA Bull 2X ETF (BABU)
- Direxion Daily MRVL Bull 2X ETF (MRVU)
- Direxion Daily SOFI Bull 2X ETF (SOFA)
My concern is not about these funds themselves. It is twofold.
First, that they will be misused by investors. I know, that’s their problem, not mine. but when someone gambles on a leveraged index ETF on a basket of stocks, even a basket of 10-20 of them, there’s some diversification. Not here.
Of course, the key to using this is position sizing, which I talk about here a lot. When I buy a leveraged ETF, I typically buy it at the same exposure level I would an unleveraged ETF. So if I were buying ASMU, I’d ask myself, “what would be my starting position in ASML if I were buying it right now?” Then I’d divide that percentage of my portfolio and/or dollar amount in half. That’s how much ASMU I’d buy.
Second, this reminds me of many past market eras, where the product flood gates opened, as if to “ring a bell at the top.”
The Bottom Line on New Leveraged ETFs
Let’s close here by charting the underlying stocks of those four new Direxion 2x bull ETFs.
ASML (ASML) is indecisive but overvalued technically. And selling at more than 50 trailing earnings.
Alibaba (BABA): Chart is leaking, $120 is a potential target. Chinese stocks’ latest rally was the typical 50% in a flash, then a skittish few months. Look at the chart to see how this has become routine for Alibaba. That makes it a good candidate for both leveraged long and short ETFs.
Marvell (MRVL): Any stock with a 10-month range from $120 to $50 a share is ripe for leveraged ETFs, right? But only if you know your limits.
SoFi (SOFI): Easily the worst of the bunch, currently. This chart has $10 written all over it. The Percentage Price Oscillator (PPO) is in worse shape than it has been at any point in this most recent descent. Translation: sellers are piling on, and rallies are being sold. Hard.
Remember what destroys capital most, based on Wall Street’s long history. It is not missing upside, it is getting hammered by using leverage like a gambling tool.
This is a time when the temptations are greater than they’ve ever been for retail investors. Learn risk management.
Ironically, in this article focusing on four new 2x leveraged long ETFs, the charts here make more of a case to start screening for funds that rise when stocks fall.
And since these stocks cannot be singled out, since there are hundreds that look like this, there are plenty of ways to start developing defensive investing skills. Barchart’s ETF screener is a great place to start.
Rob Isbitts created the ROAR Score, based on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and create their own portfolios. For Rob's written research, check out ETFYourself.com.
