Buying FAS: Advantages and Disadvantages
**Article Title: Assessing the Long-Term Performance of the Direxion Daily Financial Bull 3x Shares ETF**
In the world of exchange-traded funds (ETFs), the Direxion Daily Financial Bull 3X Shares ETF (FAS) stands out as a leveraged fund designed to deliver triple the daily performance of the S&P Financial Select Sector Index. This index, comprising major financial stocks such as JPMorgan, Berkshire Hathaway, and Bank of America, presents an attractive proposition for investors seeking to capitalise on the financial sector's growth.
However, FAS's strategy, which involves the use of swap contracts with banks to amplify returns, comes with its own set of risks and considerations. One key factor is its daily leveraged design, which means that gains and losses are reset daily. This can lead to significant divergence from the S&P Financial Select Sector Index over longer periods, as compounding effects are not cumulative.
Another critical factor is FAS's dependence on swap contracts. These agreements provide synthetic exposure to multiple times the invested amount through short-term loans, but they also come with interest costs. These costs can affect net returns, especially during periods of high interest rates.
FAS is also highly sensitive to interest rates. Higher rates can increase the cost of borrowing, potentially reducing net returns. Over the past three years, FAS's price rose by 137% compared to the index's 60% advance, but it could quickly give up gains during a market downturn.
Historically, FAS has shown significant variability in performance, with an average 40.6% rise over 52-week periods and an accuracy of 68.75% in rising during these periods. However, its long-term performance compared to the S&P Financial Select Sector Index is generally less consistent due to its daily reset mechanism and reliance on leverage.
Investors should be aware that FAS can't triple the Financial Select Sector index's gains over the long term due to its daily resets and interest on swap contracts. However, if the financial sector performs well, FAS could generate market-beating gains due to its leveraged design.
Moreover, FAS could be used as a hedge against other bearish bets on the financial sector, offsetting losses if those stocks rally instead. It's essential to understand, however, that FAS's heavy dependence on swap contracts exposes it to credit risk, as failure of a counterparty bank could result in lost leveraged exposure and potential interest payments.
President Donald Trump's push for lower interest rates could potentially strengthen banks and increase borrowing activity, making FAS an attractive investment option. However, it's crucial for investors to consider their risk tolerance and investment horizon before investing in FAS, as it may not be suitable for conservative, risk-averse, or passive long-term investors.
In conclusion, while FAS offers the potential for high returns during favorable market conditions, its long-term performance is highly sensitive to market volatility and interest rates. Investors should carefully weigh the risks and rewards before including FAS in their investment portfolios.
- For investors looking to capitalize on the financial sector's growth, the Direxion Daily Financial Bull 3X Shares ETF (FAS) provides an attractive opportunity, as it aims to deliver triple the daily performance of the S&P Financial Select Sector Index.
- When considering FAS as an investment, it's crucial to take into account the risks associated with its daily leveraged design, which resets gains and losses daily and may result in significant divergence from the S&P Financial Select Sector Index over longer periods due to compounding effects not being cumulative.
- FAS's reliance on swap contracts, which provide synthetic exposure to multiple times the invested amount through short-term loans, can affect net returns, particularly during periods of high interest rates, as they come with interest costs.
