That’s right.
I’m tired of all the stability, certainty, and guaranteed returns in the
stock market lately.
Or so seems to be the thought process behind Direxion Funds’ introduction of
a couple of brand-new ETFs into the market yesterday.
One fund is a bullish fund (BGU) and the other is bearish (BGZ), each looking
to replicate the gains or losses of the Russell 1000 index… except at three
times leverage. In other words, 300% of the gains or losses that the Russell
1000 enjoys or suffers can be yours for the price of three little letters.
Some investors are horrified by this idea – that the already huge market
swings we’ve recently experienced could be amplified with derivative securities
such as these – and will shy away from them because their knuckles are white
enough as it is.
Who the hell believes this country needs more leverage of any kind???
I do.
Not only am I not horrified, I am excited beyond belief for quite a few
reasons.
An impatient trader’s dream
The best friend of a trader, particularly intraday, is volatility. Large
price swings allow more opportunity for traders to move in and out of stocks,
currencies, commodities, or other cookie jars they might have their hands
in.
Some traders prefer to trade index funds that replicate returns of either the
broad market or at least sectors of the broad market. The reason for this being
that although we welcome volatility, the surprises that are
associated with individual stocks are not often viewed with kind eyes.
There are benefits and drawbacks to trading broad market indices. For
example, there is a reduction in company risk, which as of
late tends to be more dangerous than market risk. In other words, if a
company reports dismal earnings, layoffs, or shocks investors with a few
“mistakes” in its accounting measures, that particular stock is sent to the
gallows, whereas the overall market may only be minimally affected. True, market
risk still exists, but comparatively it can be much more devastating
(percentage-wise) for a company to come out with poor news than the entire
market to come out with a surprise.
The problem with trading broad market indices in a small time frame is that
traders are exchanging company risk for less volatility – thus less chance for
price fluctuation and higher returns.
With these newly introduced funds, traders can avoid the risk associated with
owning an individual company for any length of time, but receive the large price
fluctuations normally only associated with individual stocks… or even more
so.
Somewhere between owning a stock and an option
The typical investor is comfortable with the familiarity of owning a stock –
in other words, a long position.
