Editor's note: Any and all references to timeframes longer than one trading day are for purposes of market context only, and not recommendations of any holding timeframe. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don't have the resources, time or inclination to constantly monitor and manage your positions, leveraged ETFs are not for you.
Compared to their large-cap peers, the small cap sector of the equity market has underperformed notably over the past few months. From an even longer-term perspective, the entire small cap sector hasn't been this inexpensive compared to large caps in about 20-years. This creates a unique opportunity from an arbitrage standpoint – could this lagging sector within equities finally catch up?
The Small Cap Revival Case
Many small cap stocks are domestically-oriented. That is, most of their business is focused within the United States. On the other hand, large cap stocks are typically multi-national entities with business affairs across the globe. The macroeconomic environment has recently evolved in such a manner that could start to favor small cap stocks. Historically, a stronger U.S. Dollar led to outperformance by small caps. However, this hasn't been the case in the last year, but that could be on the cusp of changing, especially if recession fears retreat and inflationary pressures are quelled. For traders looking to take a position according to this historical relationship, Direxion offers the fund, which tracks 300% of the daily upside of the Russell 2000 Index.*
Below is a daily chart of TNA as of June 9, 2022.
Candlestick charts display the high, low (stick), open, and closing prices (body) of a security for a specific period.
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor's shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For the most recent month-end performance go to Direxion.com/etfs. For standardized performance click here.
Inflation and Recession Risks
Despite some signs that small cap shares could be due for a bounce, there remain serious economic issues with respect to recession risk and multi-decade high inflation that could continue to plague the sector. Not to mention that small caps have been leading the overall equity market lower during this latest correction. For traders that deem the risks outweigh the opportunities in the small cap space, Direxion offers the fund, which tracks 300% of the daily downside of the Russell 2000 Index.
Below is a daily chart of TZA as of June 9, 2022.
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor's shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For the most recent month-end performance go to Direxion.com/etfs. For standardized performance click here.
Notable Small Cap Sectors
The top 3 largest sectors within the Russell 2000 are healthcare, financials, and industrials. A renewed bull run in these three sectors could prove to be a catalyst for a strong bounce in small caps, but on the other hand, persistent weakness in these sectors would bolster the bearish case. Rising rates were historically bullish for financials, although this correlation hasn't held up in the past year, perhaps due to the inflation rate being too high. When it comes to industrials, the sector is in a unique position to pass down higher input costs onto customers, but of course, this assumes demand remains constant, which is always uncertain when inflation is rampant.
For traders looking to stay nimble in some of the most volatile markets we've seen in years, Direxion is with you. You know that TRADING is different than investing. But the opportunity to take advantage of short-term trends is only won, if you get the direction right. Stay nimble, and monitor your Leveraged ETF positions frequently.
*Definitions:
The Russell 2000 index is a market index comprised of 2,000 small-cap companies.
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Leveraged and inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.
Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged, or daily inverse leveraged, investment results and intend to actively monitor and manage their investment.
The Russell 2000® Index is a trademark of Frank Russell Company ("Russell") and has been licensed for use by the Trust. The Direxion Daily Small Cap Bull and Bear 3X Shares are not sponsored, endorsed, sold or promoted by Russell. Russell makes no representation regarding the advisability of investing in the Direxion Daily Financial Bull and Bear 3X Shares.
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