FAS is the Exchange Traded Fund (ETF) that returns three times what a basket of financial stocks return. FAZ is the ETF that returns minus three times the basket of financials (inverse ETF). In volatile markets like we have had since last fall, these ETFs will go to zero.
Here is a visual way to see that.
The return for any ETF or stock is S * (1 + ret1) * (1 + ret2) ….. after two days returns of ret1 on day 1 and ret2 on day 2. Where S is the stock price at the open of day 1. For FAS the return would look like:
FAS * (1 + 3 * ret1) * (1 + 3 * ret2)
If we look only at (1 + ret1) * (1 + ret2) and the same term for FAS, we can think of it as an area. If we had three terms it would be a volume. If we had more terms it would be a hypervolume. The point is, you maximize the area or volume when the terms are the same. That is, a square has a greater area than a rectangle with one side longer than the square and one side the same amount shorter than the square.
FAS goes to zero because when the financials drop, one gets a term (1 + 3* ret) that is much smaller than one, squashing the “volume” that gives the current price.
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