Biggest Leveraged ETF Losers – DWTI, UVXY, SMK
The Dow Jones Industrial Average leveled off around 15,000 during this holiday shortened week. But that didn’t stop these three leveraged ETFs from making a big move down.
Let’s take a closer look at what’s driving the losses…
VelocityShares 3x Inverse Crude ETN (DWTI)
DWTI has lost a whopping 16% this week. And it’s down more than 50% from the 52-week high.
As the name suggests, DWTI is designed to move in the opposite direction of and 3x (300%) as much as an index of WTI crude oil futures.
What’s behind DWTI’s horrible week?
The obvious answer is US crude oil prices are going up.
In fact, WTI crude oil broke out above $100 per barrel for the first time all year.
The price for a barrel of WTI crude has been steadily rising as new pipelines help eliminate the bottleneck in Cushing, Oklahoma where WTI price is set. The new pipelines are transporting crude oil to refineries on the East Coast.
But the straw that sent crude oil above $100 per barrel was a drop in US oil inventories and instability in Egypt. Obviously, any disruption to the flow of oil out of the Middle East will cause oil prices to jump higher in the short term.
In other words, it hasn’t been a good time to be short crude oil futures. But if the concerns over Egypt and domestic stockpiles are overblown, we could see WTI crude fall right back into the $90 to $95 range. And DWTI could be among the best performing ETFs next week.
ProShares Ultra VIX Short-Term Futures ETF (UVXY)
UVXY dropped more than 14% over the last week.
This leveraged ETF tracks the VIX market volatility index. It’s designed to move 2x or twice as much as the VIX short-term futures index.
Why the drop in UVXY?
The simple answer is investors’ expectations of market volatility in the short run have fallen considerably over the last week. The VIX does this by looking at the number of call and put options traders and exchanging on the S&P 500.
In short, the higher the VIX, the more volatile the S&P 500 is expected to be, and the lower the number, the less volatile the S&P 500 is expected to be. VIX values greater than 30 are seen when a large amount of volatility exists. And values below 20 typically indicate less stressful or complacent markets.
Over the last week, the VIX has fallen from a high of nearly 22 to around 16 today. So investors are clearly less concerned about the recent market correction accelerating to the downside.
I wouldn’t be surprised to see the VIX continue to fall back toward the recent lows. In fact, I’d steer clear of betting on a rebound in UVXY until the VIX comes closer to 12.
ProShares UltraShort MSCI Mexico ETF (SMK)
Investors who bet on the selloff in Mexican stocks accelerating to the downside have been run over this week. SMK has dropped a whopping 13%.
SMK is designed to move twice as much as and in the opposite direction as the MSCI Mexico Investable Market Index. This index is dominated by consumer staples (26%) and telecom (20%) stocks. In fact, 20% of MSCI Mexico Index is composed of a single stock – Latin American telecom giant America Movil.
What’s behind the selloff in SMK?
Investors pulled a lot of money out of emerging markets over the last few weeks after the Fed began to hint at the end of their massive $85 billion per month asset purchase program. The exodus sent SMK soaring to the highest levels of the year.
Investors returned to emerging markets to pick up these stocks at a big discount to where they were trading just a few weeks ago. As a result, SMK has tumbled lower as Mexican stocks rebound.
The outlook for economic and earnings growth in Mexico isn’t good. But at this point, the markets have already priced in the weakness. We’ll likely see SMK have trouble gaining any traction going forward.
Here’s the upshot…
The markets were relatively calm this week. But these exotic leveraged ETFs focused on shorting WTI crude oil futures, short term VIX, and Mexican stocks still managed to rack up some big losses. If nothing else, be careful how you use these products because they can rack big losses in a hurry.
Good Investing,
Corey Williams
Category: Commodity ETFs, ETFs, Foreign Market ETFs, Inverse ETFs, Leveraged ETFs
