StockTwits Loves the FAZ & FAS ETFs

While I don’t use Twitter much in the traditional sense. I’m a huge fan of its stock-flavored offshoot StockTwits.com and make a point of posting there just about every day. It offers helpful stream-of-consciousness commentary from market players, a wealth of interesting links, and the ability to engage in quick conversations about stocks without the hassles of a message board.

And what are the folks at StockTwits talking about? Those high-octane Direxion FAZ and FAS exchange traded funds (ETFs):

So what are they?

Direxion specializes in ETFs that leverage an underlying index three times. For example, the company’s Large Cap Bull 3X Shares ETF aims to deliver 300% of the return of the Russell 1000 Index. Direxion does not hide the fact that these are not for the faint of heart, stating the following in the prospectus that nobody reads:

“These ETF’s are clearly high-risk vehicles, and the fund family’s prospectus (does anybody read these) states the following:The Funds are intended to be used as short-term trading vehicles. The pursuit of leveraged investment goals means that the Funds are riskier than alternatives which do not use leverage.”

And over time, the funds’ returns will likely return less than 300% of the return of each one’s underlying index. This is because Direxion’s funds incur financing costs relating to their leverage, and also because the quantitative and statistical methods used in managing the funds will not always deliver exactly 300%.

Now the reason the FAZ and FAS ETFs are so popular these days, trading millions of shares a day, is because they focus on the financial sector. They aim to return 300% of the return of the Russell 1000 Financial Index (FAZ is for the bears, FAS is for the bulls), which is pretty insane when you consider how volatile the financials are.

It’s not hard to see why they’ve become a big favorite of active investors and day traders. Stock jockeys love volatility and the FAS/FAZ ETFs deliver it in spades.

And if you really want to get crazy, you can buy options on them!

Think about it. If you’re bullish on financials, you can buy call options on an index that is leveraged three times. I’ve heard of big banks using options on options, but this is the closest the average Joe can get to something like that. Just be aware that the implied volatility readings on these ETFs is sky-high – well over 200% for March.

So if you really need some juice for your portfolio, check out these ETFs, and don’t forget your barf bag.