This is a follow up on my previous post about a trading strategy with FAS and FAZ, the Direxion Financial 300% ETFs. These two funds are tracking their index on a daily basis. This means a 10% drop today followed by a 10% rally tomorrow will NOT bring back the ETF to where it was. For example, if the fund started at $100, the 10% drop would bring it at $90. The next day, the 10% rally would bring it to $99, not $100 because 10% of $90 is only $9. In a volatile environment, this “eats” the fund’s value in a short time. But the value doesn’t really disappear… Direxion rebalances the funds everyday to make sure its value reflects the market, at 300% during the day.
To help longer term investors, Direxion will now offer similar funds with 2x and 3x leverage but tracking the index on a monthly basis. During the reference month, the value may drift away from the index value but should match the 200% or 300% return at the end of the month. In other words, this doesn’t replace the daily funds, it complements them. When more details are available about these new funds, I’ll see if I can find a strategy to trade the dailies with the monthlies.
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