San Diego Union-Tribune (Sunday)
Investments to avoid
My dumbest investment occurred during my first week of investing: I lost my entire two-week paycheck in less than five minutes trying to day-trade shares of Direxion Daily Gold Miners Index Bear 2X, an apparently risky exchangetraded fund (ETF). — D.L., online
The Fool responds: Fortunately, most ETFS aren’t nearly as risky as that one. A typical ETF tracks either a market index, such as the S&P 500 or the Bloomberg Barclays U.S. Aggregate Bond index, or a category of securities, such as dividend-paying stocks, small-cap stocks or Latin American stocks. Certain ETFS, though, aim to deliver some multiple of the performance of a particular index; these are known as leveraged ETFS. Inverse (sometimes called “leveraged inverse”) ETFS hope to deliver the opposite of an index’s return. These ETFS use swaps, futures or derivatives — essentially, securities that few people understand — and they often don’t meet their performance goals.
Your leveraged inverse ETF tracked the NYSE Arca Gold Miners Index, so if that index fell by 10 percent, you’d gain twice that — 20 percent. If it rose 10 percent, you’d lose 20 percent. These ETFS are only meant to be very short-term investments: They reset themselves every day, and can wipe out those trying to buy and hold them. Most of us should just steer clear of 2X (“Ultra”), 3X and 4X funds. Learn more by using Google to search “leveraged ETF site: Sec.gov.”