Reading FA (Financial Advisor) magazine this morning and came across the Direxions advertisement. For anyone who doesn’t know, Direxions is the company that brings us the 3X ETF’s. In small print near the bottom it says the following:
“The use of leverage by a fund means the Funds are riskier than alternatives which do not use leverage. The risks associated with the funds are detailed in the prospectuses which include adverse market condition risk, advisers investment strategy risk, aggressive investment technique risk, concentration risk, counterparty risk, credit and lower-quality debt securities risk, equity securities risk, currency exchange risk, daily correlation risk, daily rebalancing and market volatility risk, depository receipt risk, foreign and emerging markets securities risk, sector securities risk, interest rate risk, inverse correlation risk, leverage risk, market risk, non-diversification risk, shorting risk, small and mid cap companies risk, tracking error risk, and special risks of exchange-traded funds, market timing activity and high portfolio turnover risk, investing in other investment companies and ETFs risk, commodities securities risk, geographic concentration risk, valuation time risk, derivatives risk, commodity-linked derivatives risk, wholly-owned subsidiary risk, tax risk, options and futures contracts risk, security selection risk, Debt instrument risk, Gain limitation risk, U.S. Government Securities risk, and special risks of Exchange-Traded Funds.”
I can imagine the meeting where the lawyers came up with this list, a group of weasily characters endeavoring to cover all their bases like a grounds crew rolling out the risk tarp. I am surprised they didn’t include risk of risks risk.
Reading that disclaimer I am wondering if just owning one of their products voids your life insurance policy. There are fewer risks in being an astronaut, a rodeo clown, or one of those guys that paints suspension bridges. I can hear this conversation between the rodeo clown and his investment advisor:
Zeke: Sure, I have the “gored by a ton of angry pot roast risk” but I am really scared of this “special risks of Exchange Traded Funds”, I mean what is that exactly.
Murray Lynch FA: That’s either a “guy in dark suit jumping out of window, landing on your head risk” or a “shady opaque weirdly constructed underlying product risk”. Luckily for you I have this “Helmet of Diversity” which protects you from both, with the splatter stain rider you’re totally safe.
Zeke: Check please! I’ll take my chances with “Scene of the Crash”.
If any one has a fast and easy methodology to assess and value the risk of these products please have yourself checked by a psychiatric professional or take care to avoid Kryptonite.
