Beware Triple-Leveraged Gold ETFs: Macro Risk Advisors

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In the event it falls 5 percent, two leveraged funds from Direxion, a firm specializing in geared and inverse instruments, would be forced to sell 28.6 million shares in the gold miner ETF in total, MRA said. That’s more than three-quarters of GDX’s trailing 30-day average volume, according to data compiled by Bloomberg.

All told, the rebalancing wave could spur a jump in the ETF’s volatility and drag its price ever lower, in a tail-wagging-the-dog dynamic, according to the risk-advisory firm.

The funds in question: The Direxion Daily Gold Miners Index Bull 3x Shares, ticker NUGT, and the Daily Gold Miners Index Bear 3x Shares, DUST, which have seen their combined assets rise in recent years to $1.5 billion. NUGT is the single largest shareholder in the Van Eck fund — as of July 26, it held 32.8 million shares, worth $715.9 million.

“Forced selling of this magnitude would have the potential to cause a spike in realized volatility in GDX,” MRA said in a recent note.

Conversely, a dramatic gain in the Van Eck fund would force both leveraged ETFs to buy shares to rebalance. If they didn’t, their daily leverage would veer from the advertised level. Representatives for Van Eck and Direxion either declined to comment or didn’t return requests for comment.

One new ETF, wary of the pitfalls that can trip up these products, is plotting a different course in order to deliver high returns that are typically associated with leverage, without the use of borrowed money or derivatives.

The Salt truBeta High Exposure ETF tracks an index of about 100 equal-weighted stocks that have high sensitivity to market moves. The $3 million fund is down 1.5 percent since it started trading in May.

“That was the challenge we wanted to unravel — how do you create a product that gives the benefits of leverage without the side effects?” Alfred Eskandar, president of New York-based Salt Financial, said at the fund’s launch.