Investing

Why I Bought TZA: A -3x Leveraged ETF

This morning around 7AM I was searching through Robinhood looking at different ETF’s. I was thinking about buying a gold or silver mining ETF because I was predicting market uncertainty in the near future.

Instead, I stumbled upon Direxion’s leveraged ETF’s. My interest was piqued looking at the 52 week highs vs. the 52 week lows. The lows were low and the high’s were massive!

Here is a link to Investopedia’s article on Leveraged ETF’s by Gordon Scott. I won’t go into the details here.

I am usually a market optimist and someone who is very risk-averse. I like to focus on long-term returns and not beating the market. So deciding to buy a -3x leveraged ETF was a big move away from my usual investing comfort zone.

Normally, I don’t go into numbers details in my portfolio, but for this example I will share my exact prices.

I purchased 50 shares of TZA at $6.90 cents a share.

Why did I buy TZA now?

Honestly, I am fully aware that if this does well it will be mainly due to luck. I had heard of leveraged index funds, but never done any research on them until AFTER I had already bought TZA. I could have just as easily bought another stock this morning, this was not a well thought out purchase.

1.) I had cash on hand.
I’m currently not paying rent, and I just finished working a job. So I had a few hundred dollars in cash to play around with.

2.) I’m confident in my other long-term investments
Since most of my money is in long-term Vanguard ETF’s… I don’t mind being a bit more aggressive with the rest of it. I will not be financially ruined if this goes to 0.

3.) I’m young and I have time.
For 50 shares at $6.90 each, I put about $345 in. Of course, losing any money is a terrible feeling. But I have lots of time to recoup my costs. $345 will not ruin me financially, and I didn’t need to go into debt to fund it. I also don’t need the money anytime soon, so if this takes 20 years to pay off, I can wait.

My “strategy”

I put strategy in quotes, because I don’t want it to sound like I have some master plan. I did no technical analysis, I did no research, this goes against all my other investing strategies, I just guessed.

I looked at TZA and saw it was near an all time low, but TZA was also at an all time low in April 2009 at $39,000 a share. It was at an all time low in 2013 at $1,000 a share. It was at an all time low in 2017 at $60 a share.

Just because I bought it at an all-time low does not mean I bought it at THE all-time low.

To remove the stress of deciding when I will sell if the price does increase, I set up limit sells. A limit sell is an automated process that sells a stock when it reached a predetermined price. To lessen FOMO, I gave myself a tiered-limit sell process.

Limit SellsSharesPrice
2$50.00$100.00
5$75.00$375.00
13$199.00$2,587.00
13$300.00$3,900.00
Total Limit33$6,962.00
My nonsensical limit sells.

I still have 17 shares I haven’t decided how I am going to allocate. I think my best options are either to place more limit sells to recoup my costs around $50 a share. That way I can recoup my costs during a smaller dip, and have the rest waiting for a larger dip. Or, I will keep the shares incase the price goes above $300.

The gains I’m looking at here are astronomical for me. I can not imagine making a trade that nets me almost $7,000.

I am very lucky to be in a place financially to make a risky move.

The reason I am (mostly) comfortable making this trade are because I believe strongly in my other long-term investment strategies. I am not afraid of market volatility, because I believe in the long run that stocks will increase.

I am also lucky to have cash on hand to be able to make a risky trade. If I had to borrow money to make a similar market prediction, I would not have done it.

Do I think markets are going to crash in 2021?

I would love to be able to give a clear yes or no answer to this, but I can’t. If there is anything I have learned it is that trying to predict the markets rarely goes well.

This may seem ironic, coming from a woman who just put a relatively large sum of money against the market. I think that markets can be in the perfect position for a recession and still continue to do well for years or even decades.

Since I have began investing in 2016 (a short amount of time compared to many traders), there have been predictions of a recession. If I had learned about this kind of ETF in late January of 2017 I would have invested money in it. On January 27, 2017, TZA was at 95.55 a share.

If I had bought the same number of shares in January 2017, it would have cost me $4,777.50. I would likely be kicking myself for being such a pessimist.

What I hope to gain.

Obviously, money. I don’t want it to sound like I am not doing this for money.

Although I talk a lot about luck, if this does do well I know it will go to my head. It will probably make me more prone to risky investing in the future.

Putting myself in a risky position is not necessarily a bad thing for me. I am very frugal and I have good financial habits. It’s probably good for me to take on a bit more risk within reason. (Don’t expect me to start making margin calls anytime soon though.)

I also want to test my comfort levels with loss and market volatility. I have lived through some of the biggest market crashes in modern times, but I was about 3 years old for the dot com bubble and 10 for the housing crisis of 2008. Most of my time being aware of markets has been for the amazing market returns from 2011 till now.

In September 2018, I bought a share of Tesla stock after Elon Musk smoked pot on air with Joe Rogan. This caused the price to plummet to about $50 a share. At the time, I couldn’t handle the volatility. I didn’t have a long term goal in place so I sold a few months later and made about $20 profit.

If I had held onto that stock… I would have made a few thousand dollars.

Morgan Housel writes in his book The Psychology of Money, that volatility is the price you pay for being in the market. If only Housel’s book was around in 2018.

S/N: I don’t know how day-traders and WallStreetBets fanatics can make trades 100x riskier than this.

As of right now, 3 hours after buying, I’m up 5%. I’ll keep this updated to see what happens.

Update as of 1/7/20 :
Since writing this post, I have done a bit more research in leveraged ETF’s. The most prevalent way of thinking about leveraged ETF’s is that they should be avoided due to the volatility decay.

Here is the easiest example of volatility decay in a 3x leveraged bull market ETF:
Let’s say you have $100 in a 3x leveraged ETF.
If the overall stock market decreases by 1%, you will be down 3% making your money worth $97. If the stock market then decreases another 1%, you will be down 3% on the $97, this means your portfolio is now worth $94.09.

Now, you may think in order to make your money back you need the market to go up 2%, but what you really need is the market to go up 2.09%, so that your $94.09 increases by 6.28% to bring you back to about $100.

So, your money is punished during times of high volatility by volatility decay. The thing is, this also happens to stocks that are not leveraged. It is just more pronounced in leveraged ETF’s. Here is a really good article on leverage decay, it explains how depending on market conditions a leveraged account can be a good long-term investment.

Here is how I am feeling now about my investment in a -3x leveraged ETF.

I have currently lost money, which I expected. Even with the storming of capitol hill, stocks are still increasing rapidly. I do predict that stocks will crash sometime this year, because the current market frenzy seems over-hyped. The increase in my optimistic stocks are more than compensating for the decrease in value of my TZA ETF.

I have actually been feeling more confident about my portfolio since this purchase, because now I know that if stocks do fall, I will still make money. I am worrying much less about having cash on-hand in case of a market crash because I will be able to re-invest my TZA stock into my long-term predictions.

If the market does not crash before my leveraged account dwindles to almost nothing, well that’s okay too. I will have lost a few hundred dollars in TZA, but my gains in my other stocks will more than make up for that. So far, this investment has given me MORE peace of mind, not less.


I am NOT a registered financial advisor. Nothing I have written should be taken as financial advice. Invest with a registered financial advisor, or at your own risk.


Anyway, I’d love to hear your thoughts on this! Share a comment or vote in the poll below!

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