Over the years we have frequently commented on the potential dangers of holding leveraged ETNs/ETFs for longer than a day or two, and while the potential pitfalls are well known, they can’t be stressed enough. This is especially the case with triple leveraged ETFs (3X). Two of the more popular 3X ETFs, in terms of volume, are the VelocityShares 3X Long Natural Gas ETN (UGAZ) and the VelocityShares 3X Inverse Natural Gas ETN (DGAZ). Like oil, natural gas has had a rough quarter to start 2015, and with less than two trading sessions left in the quarter, the price of the front month future contract for natural gas has declined 7.7%.
With a decline of nearly 8% in natural gas so far this quarter, you would expect UGAZ — which benefits from an increase in natural gas prices — to be having a bad year, and DGAZ — which is a bet on falling natural gas prices — to be doing pretty well. The reality, though, is that both securities are down on the year. Yes, the UGAZ ETF is doing very poorly (down 42%), but DGAZ is also down by 6%, which is down almost as much as the commodity itself! Think about that for a minute; the levered ETF that benefits from falling natural gas prices is down by almost as much this year as the commodity itself. While levered ETFs certainly have some use as a short-term vehicle for traders making bets (not investing), the longer you hold these securities, the more they work against you.