BGU moves as much as some small-caps out there. Since one can't cheat the R:R ratio, this would mean that one is taking small-cap level risk (i.e. blow up risk). Is this correct? What are the chances of BGU blowing up?
BGU 3X ETF vs. Small Caps?
- Thread starter short&naked
- Start date
It is a large cap ETF. If I understand you question correctly about" blowing up" then I would sa that a small cap stock can have a very large gap from one day to the next and this I would indeed consider a "blow up". If you mean "blow up" as in the company goes out of business then you are comparing apples to oranges. This is a large collection of large caps. If you got a huge gap on this ETF that would mean all those large cap stocks would have to have had a gap as well. All of them. Obvoiusly not a high chance event. Also the risk of all those large caps going bust at the same time is not a high chance event either. (Although at the moment...) So basically you are looking at being able to get the volatility of a small cap with much higher stability. Of course you still have to guess right which direction you go in and you still want to make this a portion of your account and not the only position
BGU ("BiG Up") is a ETF seeks to perform at 300% positive correlation to the Russel 1000 BigCap index. I've been trading BigUp and it's inverse sibling BGZ ("BiGZero") and have done well so far. The key is to find the opportunities, get in, and get out fast. The components of BGU are rebalanced on a daily basis.
See: http://direxionshares.com/etf/lc_bull_3x_shares.html?overview;funds=bgu.
See: http://direxionshares.com/etf/lc_bull_3x_shares.html?overview;funds=bgu.
Thank you for this thoughtful post!
By blowing up, I was refering to the ETF fund disappearing. BGU gets its leverage by using credfit swaps and seems to be exposed to counterparty risk. (is this accurate?)
It may seems as though I am comparing apples to oranges, and in a way you are right, but the commonality is still the R:R ratio. If a leveraged fund has the same profit potential as a small cap, then the risks must be similar. This seems to me to be something one cannot cheat. That's why I question if you can get "volatility of a small cap with much higher stability". (If I could that would be great!)
If, however, one could get the movement of a market index with greater leverage and liquidity than small caps, I would never see the point in trading small caps ever again!
Quote from short&naked:
Thank you for this thoughtful post!
By blowing up, I was refering to the ETF fund disappearing. BGU gets its leverage by using credfit swaps and seems to be exposed to counterparty risk. (is this accurate?)
It may seems as though I am comparing apples to oranges, and in a way you are right, but the commonality is still the R:R ratio. If a leveraged fund has the same profit potential as a small cap, then the risks must be similar. This seems to me to be something one cannot cheat. That's why I question if you can get "volatility of a small cap with much higher stability". (If I could that would be great!)
If, however, one could get the movement of a market index with greater leverage and liquidity than small caps, I would never see the point in trading small caps ever again!
You make some very good points. It would indeed seem that similar R:R would require the similar amount of risk. It is probably so. The absolute risk may be the same (going under), however the trade risk would be different. An ETF would not be subject to the wild gaps that an individual stock (small or large cap) is subject to. From a trading perspective it would indeed be beneficial to use a 3x ETF to individual small cap stocks. I prefer the TNA TZA combo right now as in new bull markets or bear rallies the small caps tend to lead. Being able to get that powered 3x and diversified in one single instrument is a very nice thing indeed. Provided you time your purchases right.... That would actually be the only thing you have to think about since the selection process is taken care of.
I have no idea how the leveraged ETFs obtain that leverage. I probably should do that due diligence on these leveraged ETFs. Long or short term hold one is still exposed to one of these going under. Not having done my DD I am blithly accepting that because SSO and SDS for instance have been around for a while they are probably ok. By the same token BGU BGZ and TNA TZA (their small cap 3x ETF) are probably ok too. The regulators would have made sure of that - right?
Well now I am not so sure about that any more. Read about Madoff and how the SEC flubbed their investigations of that firm and the fact that someone actually even warned the SEC multiple times makes one aware that the SEC is probably crooked and/or uncapable of performing their task. So don't trust the regulators.
I am not equipped to assess whether a leveraged ETF is capable of staying in business so in effect I accept this as part of my trade risk and therefore do not put all my money in one ETF. Should the outlier happen then I would be able to handle the loss. Other than that the leveraged ETF are a marvellous tool for simplifying high volatility trading. The TNA was up over 10% in one day at some point this week. Time that well a few times a year and you are doing great.
Hello,
Hopefully I can answer some questions. I am quite familiar with these 3x products. Let me try to explain how Direxion gets its exposure. Long side is where Iâll start because its easier to explain.
These 3x index based ETFs are quite simple. They track or are benchmarked to an index. BGU is benchmarked to the R1k. If you look at the Russell 1000 on a daily basis there are 1,000 stocks each with different weightings. What Direxion does is âoptimizeâ the 1000 names down to 385 stocks, each with appropriate weightings that accurately track the R1k just as the 1000 stocks do. They try to get it within a few basis points.
For every dollar you invest in a Direxion 3x ETF here is the breakout:
Shareholder investment:
80% - Basket of stocks â Direxion outright owns 80% equities in the ETFs
+ 20% - derivatives â index swaps, futures, options, etc.
100%
The 20% cash leftover is used to purchase swaps against the underlying index (Russell 1000, 2000, sectors, etc.)
So 80% stocks, equities, 220% swaps, futures, options, etc.
Hopefully I can answer some questions. I am quite familiar with these 3x products. Let me try to explain how Direxion gets its exposure. Long side is where Iâll start because its easier to explain.
These 3x index based ETFs are quite simple. They track or are benchmarked to an index. BGU is benchmarked to the R1k. If you look at the Russell 1000 on a daily basis there are 1,000 stocks each with different weightings. What Direxion does is âoptimizeâ the 1000 names down to 385 stocks, each with appropriate weightings that accurately track the R1k just as the 1000 stocks do. They try to get it within a few basis points.
For every dollar you invest in a Direxion 3x ETF here is the breakout:
Shareholder investment:
80% - Basket of stocks â Direxion outright owns 80% equities in the ETFs
+ 20% - derivatives â index swaps, futures, options, etc.
100%
The 20% cash leftover is used to purchase swaps against the underlying index (Russell 1000, 2000, sectors, etc.)
So 80% stocks, equities, 220% swaps, futures, options, etc.