Triple Leverage ETFs Heading Into Emerging Market Bonds

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The world of the triple-leveraged exchange traded funds (ETFs) has been deeply controversial. After all, they often have big tracking errors and they can face decay through time. Direxion has been the key firm behind the triple-leverage ETF model with daily moves of three-times the upward or inverse moves of underlying indexes. Now Direxion is entering the emerging market bonds.

A press release was issued on Thursday showing that the Direxion Daily Emerging Markets Bond Bull 3X Shares (EMBU) is launching, and the ETF description “seeks to achieve 300% of the daily performance of the J.P. Morgan EMBI Global Core Index.”

Direxion is known for funds tracking US sectors like gold miners, financials, oil, Chinese stocks, U.S. bonds and more. All in all, Direxion currently has dozens of leveraged ETFs in the Bull (positive return) and Bear (inverse returns) strategies.

How the markets and investors will treat a triple-leveraged ETF based on emerging bond markets remains to be seen. The index behind this new EMBU ETF is said to provide exposure to U.S. dollar-denominated government bonds, which have been issued by 55 emerging market countries.

The triple-leverage ETFs have proven to be the most volatile of all ETFs. They have also proven to generate huge losses over time, and came under fire after many inexperienced investors (and experienced investors too) found out about the tracking errors that can occur and the decay that is seen over time.

The ETF’s gross expense ratio at the start is 1.08% and the net expense ratio is 1.07%.

Unlike other emerging market ETFs, this new Direxion Daily Emerging Markets Bond Bull 3X Shares ETF is not dominated by China. In fact, no single nation of the whole 55 nations even has anywhere close to a 10% weighting, shown as follows (percentage weight per nation):

  • Mexico, 6.03
  • Indonesia, 4.96
  • Turkey, 4.55
  • Russia, 4.44
  • Philippines, 3.99
  • China, 3.86
  • Argentina, 3.76
  • Brazil, 3.72
  • Colombia, 3.43
  • Hungary, 3.38
  • Peru, 3.28
  • Kazakhstan, 3.12
  • South Africa, 3.09
  • Ukraine, 3.01

Other nations with individual index weightings of less than 3% each were shown by Direxion as follows: Azerbaijan, Chile, Croatia, Dominican Republic, Ecuador, Egypt, Lebanon, Lithuania, Malaysia, Oman, Panama, Poland, Romania, Sri Lanka, Uruguay and Venezuela. The rest of the nations had a combined weighting of 11.0%.

Direxion’s disclaimer shows some of the warnings, but there are many other risks and disclosures that need to be considered triple-leverage ETFs.

Two different disclosures were combined here, and they said:

Like all leveraged ETFs, this Direxion product is intended only for investors with an in-depth understanding of the risks associated with seeking leveraged investment results, and who plan to actively monitor and manage their positions. There is no guarantee that this Fund will meet its objective.

Leveraged and inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by investors who understand leverage risk and who actively manage their investments.

Sylvia Jablonski, managing director at Direxion, said:

Emerging market bonds can offer the opportunity to gain higher yield and return, which has been the case recently. Traders often look to emerging market bonds as a means to support or express bullish views on the prospect for growth and development of these nations.