A lot of noise has been made of late about levered and inverse ETFs. There has always been controversy surrounding them but it seems like the rhetoric has kicked it up a notch in light of the recent Finra warning that pretty much says to run screaming from the room with your arms flailing in the air.

ProShares dominates the 2X space, Direxion dominates the 3X and ProShares now has 3X for the S&P 500. 3X long has symbol UPRO and 3X short has symbol SPXU. My take on this has not really changed since the ProShares funds first came out a few years ago.

I have used and been happy with the ProShares Ultra Short S&P 500 (NYSE: SDS [1]). I wrote a couple of theoretical articles about using the double short sector funds in a pairs trade that generally would have worked until things blew up. My take on the 3X when they first came from Direxion was not with my money simply as a function of the daily reset probably being too unpredictable (I only recall writing about the 3X one time when the first ones listed).

Ron Rowland [2] brought up an interesting point with these. He thinks that brokerage firms will begin to restrict who can trade these funds, perhaps this would be a reaction to the Finra warning. In a way this makes sense because the levered funds are kind of like options (yes I know what the differences are) in that they provide the chance to be used conservatively or aggressively. We know people have blown themselves up with options in the past and I suspect the people may have blown themselves up with overly aggressive tactics involving the levered funds although I haven’t heard as much about this.

Generally speaking I think the folks likely to blow themselves up with options or levered ETFs will find other tools to blow themselves up if they cannot access levered ETF any longer.

My use of SDS has been in very small doses. Earlier in the bear market I bought at about a 2% portfolio weight as a hedge which then grew to about a 4-5% weight and then I sold. I recently instated a 2% position again. If SDS goes down a lot it will likely be because the market (IE the rest of the portfolio) has gone up.

Bottom line is it is not the tools it is how they are used.