The Dow may have had another record close with the S&P heading to an all-time high, but small cap investors might want to consider both the Direxion Daily Small Cap Bear 3X Shares (NYSEARCA: TZA) and the VelocityShares 3x Long Gold ETN (NYSEARCA: UGLD) as bets on any coming market reversal. So why might investors and traders alike want to bet on a reversal with the Direxion Daily Small Cap Bear 3X Shares and VelocityShares 3x Long Gold ETN? First of all, there is Cyprus. While another small European country finding itself in trouble is nothing new, the fact that politicians in Cyprus were willing to chuck depositors over the side with a tax was a game changer. The latest deal to “save” Cyprus looks set to wipe out large (as in rich) bank depositors – something that could easily be repeated in other places (especially given the political climate and populist fervor against the “rich” or the “1%” or so-called wealth “inequity”).
And its not just unexpected events in far off Cyprus that could roll the markets. Much closer to home there are several trials or rather municipal bankruptcy proceedings underway and no doubt many more to follow given the sad state of municipality finances. What could cause a market reaction are attempts by some municipalities (like Stockton, California) to protect the (all to fat) pensions of government employees at the expense of bondholders or insurers – not much different than what has unfolded in places like Greece or even Argentina.
Finally, there could be any number of unexpected black swan like events involving just about anything or anyone like North Korea or Iran going on the war path. In other words, its still a very uncertain world and global economy right now.
Direxion Daily Small Cap Bear 3X Shares Has Had a Rough Time Lately
The Direxion Daily Small Cap Bear 3X Shares seeks daily investment results (before fees and expenses) three times (3x) of the opposite of the performance of the Russell 2000® Index. To put that into plainer English, if the Russell 2000® Index falls 1%, you can expect the Direxion Daily Small Cap Bear 3X Shares to rise something close to 3% and vice versa. However and unless you are a trader or a small cap investor with a big appetite for risk, you probably should not invest in a leverage ETF like the Direxion Daily Small Cap Bear 3X.
The Direxion Daily Small Cap Bear 3X Shares is also down 35.7% since the start of the year, down 48.1% over the past year and down 87.4% over the past five years according to Google Finance:
VelocityShares 3x Long Gold ETN: Not For Conservative Gold Investors
When there is market turbulence, investors either head to the exits or into gold. The VelocityShares 3x Long Gold ETN seeks to provide long exposure to three times (3x) the daily performance of the S&P GSCI® Gold Index Excess Return plus a daily accrual equal to the return that could be earned on a notional capital reinvestment at the three month US Treasury rate less the daily investor fee.
To put that into plain English, the VelocityShares 3x Long Gold ETN is NOT for conservative gold investors as its using leverage to invest in gold. The VelocityShares 3x Long Gold ETN has also not performed very well in recent years given the performance of the market as its down 11.85% since the start of the year and down 20% over the past year according to Google Finance:
The Bottom Line. A look at the performance of both the Direxion Daily Small Cap Bear 3X Shares and the VelocityShares 3x Long Gold ETN does show the need to be very careful and prudent when it comes to putting money into bear funds as they were largely mauled by the end of last year when the market ended up. Nevertheless and if you are not a conservative investor and want to speculate on a coming market reversal, both of these leverage funds may reward you. Just don’t put a big chunk of your portfolio or trading capital into them.
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