UGAZ and DGAZ will go to 0!!!

UGAZ and DGAZ were brought to my attention this past November by a friend. At that time, UGAZ
was moving between 130 and 150. I asked him if he sold when it went back to 150 and he said "No." UGAZ went down below 110 after that and continued lower. At this date UGAZ is sitting at 27. I bought some when it was at 44, more at 42, more at 40, more at 38 and sold half when it went back to 42, sold more when it went up to 62. Thinking it would go up, I bought as it was going down. I got out and gave up the gains I made on it. I then took a step back and evaluated UGAZ as an investment.

I saved a picture of UGAZ chart from BigCharts.com and if you look at where UGAZ began near 70,000 and you can see it went in a straight line down to 20,000.

Question: Where is the huge jump it had at the end of 2018?

Answer: It is so miniscule on this chart that is doesn't show up. You do see the volume shoot up because everyone was chasing the money and many got slaughtered being pigs.

For those who would like to know what is UGAZ:  UGAZ provides 3 times the percentage return of Natural Gas on a daily basis. DGAZ provides the inverse (opposite) of that return. So if Natural Gas goes up 1%, UGAZ goes up 3% and DGAZ goes down 3%. If Natural Gas goes down 1%, UGAZ goes down 3% and DGAZ goes up 3%. With that in mind, after seeing the ugly chart of UGAZ, you would expect DGAZ to be the opposite and shoot through the roof.

Initially, DGAZ did shoot straight up as UGAZ went straight down, but over time they have normalized and went straight down together. To understand this, we need to take a step back into the math class. Many familiar with investments understand that down 30%, then up 30% does not bring you back to where you started. Instead you are still down 9%. It actually takes a 42.85% positive return after a 30% drop to break even as shown in my calculator screenshot to the right.

Next we should look at the underlying asset that UGAZ and DGAZ is based on which is Natural Gas. A chart of Natural Gas is not easy to find, but futures on Natural Gas can be charted easily. If you bought a future contract in 2008 on Natural Gas for this March 2019 the cost was much higher than today. Futures are similar to options and carry a premium based on the time factor. If UGAZ and DGAZ are based on the futures, it only makes sense for them to go down when you compare them with the next chart.

Looking past the charts and thinking about an investment into an ETF (Exchange Traded Fund), most all ETF's are available to trade everyday AND have the ability to buy and sell options on them. UGAZ and DGAZ are not option-able ETF's. Looking at the charts you can see why when they go straight down anyone could make money selling calls and buying puts if they were available. As long as you traded them far enough out, but not too far you would almost be guaranteed money.

Based on the preceding factors, you probably understand why I come to the conclusion that UGAZ and DGAZ are not investments as they will go to zero. You are probably wondering why are they traded on the open market if they are so bad. Velocity Shares is a popular mutual fund investment company who makes money selling you on the idea that you can get 3 times the return of the underlying asset. If they collected $80,000 per share back in 2008, they have plenty of money to pay out as it is designed to go down. That sounds like a Ponzi Scheme to me! They are not the only mutual fund company that produces these types of products.

A year ago there was huge news on people losing money when the VIX (Volatility Index) spiked up. People got fat and happy since the volatility was so low for so long, they got caught off guard when volatility spiked since their ETF was invested in a multiple of the inverse volatility. Investments like this are pushed and sold appealing to people's greed factor. They are not good to put your money and are very dangerous. You should never invest in one of these if you are looking for something to buy and hold for the future. Please do your research before investing.