Direxion Shares broke some new ground on 2/25/2010 with the first 3x leveraged and inverse ETFs to track short-term Treasury bond prices. Direxion Daily 2-Year Treasury Bull 3x Shares (TWOL) and Direxion Daily 2-Year Treasury Bear 3x Shares (TWOZ) are now available for those who wish to bet on shorter-term interest rates.

The launch of these ETFs comes as many investors try to predict Federal Reserve policy changes. The Federal Funds rate, which reflects overnight loans between banks, has been kept near zero since the financial crisis hit in late 2008. The result is a historically steep yield curve even as rates for most maturities are relatively low. Traders who play this by going long and short at various Treasury maturities may find TWOL and TWOZ useful. The expense ratio is 0.95% for the two funds.

TWOL and TWOZ are also coming out soon after the launch by ProShares of several 3x leveraged equity index ETFs. Direxion may lack the marketing muscle of ProShares and Rydex, but seems to be finding niches where it can gather assets without head-to-head competition. The firm already offers 3x bull and bear ETFs for the 30-year and 10-year Treasury markets. The two new funds further define Direxion’s fixed-income ETF product line.

As is the case in most leveraged ETFs, Direxion resets the 3x leverage factor each market day. This can lead to significant drift away from 3x leverage over periods longer than one day. Moreover, the 3x leverage factor means that a 33% daily change in the benchmark index in the wrong direction could take either of these funds down to zero. Such a sharp move in interest rates may seem unlikely – but stranger things have happened in the last two years.

  • TWOL summary
  • TWOZ summary
  • Direxion press release for TWOL and TWOZ