Here’s what’s behind the popular triple-leveraged ETFs from Direxion

While many investors are likely hoping for calmer markets after a tumultuous few years for stocks and bonds, some traders want even more volatility, and they’re using leveraged and inverse ETFs to find it. For example, the Direxion Daily S & P 500 Bear 3x Shares ETF (SPXS) has traded more than 28 million shares per day on average this year, even as the broader market has rallied. The firm’s short and long 3x funds for the semiconductor industry — SOXS and SOXL — have seen heavier trading volume. A leveraged ETF acts as a multiplier for the performance of the fund’s underlying index. Though this results in outsized performance when the index is up, losses are sharply magnified when it declines. Meanwhile, inverse ETFs use derivatives to produce returns that are opposite of the underlying index, aiming to make money when it declines. The success of the funds shows that there is an appetite among some traders to make large one-day bets on markets or sectors, according to Laura Morrison, the chief revenue officer at Direxion. “We’re not looking for long-term investors. We’re looking for daily traders who want to set a position in whatever direction they think the market is going,” she told CNBC’s Bob Pisani at the Exchange ETF Conference. Morrison said she believes that both retail and institutional investors use Direxion’s leveraged funds, though the majority of the users are probably retail. The leveraged funds are viewed with skepticism by some regulators and financial advisors. Morrison said the Securities and Exchange Commission has pushed back on the firm launching more triple-leveraged funds. Part of the concern comes from the “daily” part of the funds’ names. The leveraged funds are based on single-day derivatives, and holding them for a longer period time means could result in the performance diverging from the label. “If you don’t trade them daily, you need to make a decision daily,” Morrison said. However, she said she does believe investors understand the concept of the funds and are using them properly. “We put a tremendous amount of effort into it,” she said, explaining some of the steps taken with brokerage platforms to educate investors before they can purchase one of these ETFs. Watch Bob Pisani’s full interview with Laura Morrison above.

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