The Only ‘Direxion’ FAS & FAZ Are Headed Is Down
April 23rd, 2009 at 12:22 pm Posted by The Dean
POP QUIZ: Name the two ticker symbols most widely discussed on the internet.
THE ANSWER: FAS & FAZ
They’re both ETF’s by Direxion Fund that replicate 300% of the daily performance of the Russell 1000 Financial Services Index. FAS replicates 300% to the upside while FAZreplicates 300% to the downside (or inverse).
Do not touch these two ETF’s until you fully understand what you’re getting into! First off, FAS and FAZ are NOT designed to be long-term investments. Rather, they are both designed to be used for relatively short-term investing as part of a market timing strategy.
The reason why FAS and FAZ make absolutely terrible long-term investments is because they are compounded daily and reset after each day’s closing bell. So in reality they only work well over short, one-directional trends (i.e. market is trending up, up and up or market is trending down, down and down).
In the case of markets that move up and down often, FAS and FAZ actually decay away to nothing over time so its imperitave that students avoid holding either of these ETF’s for an extended period of time.
The good news is that Direxion is planning new ETF’s that will compound monthly rather than daily which should theoretically reduce decay. The bad new? Thousands of uneducated investors have already lost millions of dollars to the inevitable decay of FAS & FAZ right smack in the middle of the Great Recession. Check out the chart below for a great visualization of each ETF’s decay over time.
The load time on this chart is pretty bad it took a while for me. Maybe its my browser but you should check that out Mr. The Dean