3X ETF, watch how volume goes

Eight super-leveraged 3X ETFs started traded last week:
We should continue watch how volume goes on those 3X ETFs before dip in.

BGU - Russell 1000 long

BGZ - Russell 1000 short

TNA - Russell 2000 long

TZA - Russell 2000 short

ERX - Russell 1000 Energy long

ERY - Russell 1000 Energy short

FAS - Russell 1000 Financial long

FAZ - Russell 1000 Financial short

The funds are designed to deliver 300% and -300% of the daily return of their benchmark indexes, and follow in the success of the wildly successful ProShares ETFs, which provide 200% and -200% exposure to the market.

I was very skeptical of these funds' prospects at first. I worried that the funds were not appropriate for real "investors." 300% is a lot of leverage, particularly when volatility is as high as it is today. Investors could easily lose half their money in a single day.

Moreover, I was concerned about the issue of compounding. I have written extensively about how compounding causes the long-term returns of leveraged funds to deviate from their expected goals. These ETFs are designed to deliver 300% or -300% of the daily returns of their benchmarks. Over a week, month or year, however, they won't come close to that 300% return, because compounding (particularly in volatile markets) will have an enormous impact on the results.

I was also skeptical that these ETFs would attract much of a trading audience. The ProShares ETFs have enormous liquidity, which is one of the reasons they appeal to the trading community. I doubted that these ETFs could attract enough liquidity to convince the trading community to switch from the ProShares ETFs, despite the higher leverage rate offered by Direxion.

But since they launched on Wednesday, the Direxion ETFs have attracted significant trading volume and activity. On its first day on the market, for instance, the Large Cap Bear 3x Shares (NYSEArca: BGZ) traded just 13,000 shares. On day 2, it traded 123,000 shares. Today, it traded 334,000 shares.

Its twin, the LargeCap Bull 3x Shares ETF (NYSEArca: BGU) has done even better, trading 19,000 shares, 361,000 shares and 581,500 shares, respectively.

That's certainly not anywhere near what the ProShares funds trade. The ProShares Ultra S&P 500 (NYSEArca: SSO) traded 80 million shares today. But hitting half a million shares traded on just the third day on the market is pretty good for an ETF.

Add this link for a full list of ProShare ETFs.

http://www.proshares.com/funds