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By Bloomberg

There’s no need for complex quantitative models, or in-depth bottom-up analysis. All it takes is one good bet.

That’s the allure drawing traders to a pair of exchange- traded funds that take Russian stocks and triple their returns with leverage. Daily gains of more than 30 percent and the widest price swings among almost 1,500 U.S.-listed ETFs have fueled a 200 percent increase in shares outstanding in both of Direxion Investments’ leveraged long and short funds since December, while trading volume has jumped more than five-fold.

Russian stock volatility has surged as investors weigh the risks of international sanctions, plunging oil prices and potential conflict with the U.S. and its allies over Ukraine. Traders who anticipated December’s surprise interest rate increase to stem a plunging ruble made 36 percent in a day going short, triple the Standard & Poor’s 500 Index’s gain for all of 2014. Two months later, as officials from Moscow and Kiev signed a cease-fire deal, bullish investors reaped a 14 percent profit.

“When you have a leveraged ETF that’s trading on an already extremely volatile Russian market, this becomes a trade for the brave of heart,” Irene Bauer, the chief investment officer at Twenty20 Investments, which specializes in ETF portfolio solutions, said by phone on March 26. “You can see huge gains if you know all the ins and outs, but chances are high you can also lose a lot. It’s a hit-or-miss ETF.”

‘Hard R Rating’

While 30-day volatility on the dollar-denominated RTS Index of Russian stocks has receded since reaching a six-year high in January, price swings on the gauge remain the widest in the world after Greece, according to data compiled by Bloomberg. The RTS gained 1.5 percent to 868.95 by 1:47 p.m. in Moscow.

That’s helped lure hedge funds including Arbiter Partners Capital Management LLC and CMT Trading to the Direxion ETFs. Hedge funds, largely unregulated pools of capital that can bet on falling as well as rising asset prices, account for more than half of publicly disclosed investments in the Direxion Daily Russia Bear 3x Shares ETF, and more than a quarter in the Direxion Daily Russia Bull 3x Shares fund, compared with 6 percent for SPDR S&P 500 ETF Trust, the world’s largest exchange-traded fund.

“If you were to assign movie ratings to ETFs, leveraged products would get a hard R rating,” Eric Balchunas, a Bloomberg Intelligence analyst, said by phone on March 27. “The volatility in this product right now is so high it makes Bitcoin look like Vanguard. They should be used by professionals only.”

Leveraged ETFs use swaps or derivatives to try to amplify daily index returns, in contrast with conventional funds designed to match the performance. They have come under scrutiny over several issues since 2009, when the U.S. Securities and Exchange Commission warned that they were typically “unsuitable” as long-term investments in volatile markets.

‘Think Twice’

Regulators have urged caution in part because leveraged ETFs deliver the multiple on a one-day return, hence the word “daily” in their names. This ultimately can produce higher- than-expected gains if the index moves in one direction over the long term. Reversals in the index’s course, however, will lead to worse-than-anticipated returns for the funds relative to their leverage multiples. The larger the swings, the bigger the lag will be.

The phenomenon explains how Direxion’s leveraged bull ETF can be down 54 percent in the past four months, while the bear version has plunged 33 percent.

“The complexity of leveraged exchange-traded funds coupled with the level of uncertainty over Russia makes me want to advise to think twice before investing in leveraged products that track Russian stocks,” Todd Rosenbluth, director of mutual-fund and exchange-traded fund research at S&P Capital IQ in New York said by phone March 25. “The risk can be too high.”

Tenuous Cease-Fire

The stock volatility has been largely driven by traders reacting to developments in Ukraine, where the U.S. and its allies claim President Vladimir Putin is supporting a rebellion. Sanctions linked to the conflict combined with a drop in the price of oil, Russia’s biggest export, are pushing the country toward its first recession since 2009, according to economists surveyed by Bloomberg.

While the cease-fire is generally holding, government troops and separatist rebels have failed to demonstrate that they’ve withdrawn heavy weapons from the conflict zone, the Organization for Security and Cooperation in Europe said last week. German Chancellor Angela Merkel threatened Russia with more sanctions if the truce is seriously breached.

Large price swings in the leveraged ETFs can fuel huge profits for investors actively monitoring market reactions to events and news in Russia, according to Sylvia Jablonski, Managing Director and co-head of Capital Markets and Institutional Strategy at Direxion Investments.

“These products are for very quick and very knowledgeable traders that constantly monitor the market as well as the news headlines, and correct their positions,” Jablonski said by phone on March 19. “You can have a significant return if you’re on the right side of the trade.”