Direxion Daily Small Cap Bull ETF (NYSEARCA:TNA) is down 1.62% as this exchange traded fund (ETF) magnifies a 0.36% decline in its underlying small-cap index, the Russell 2000. Overall, the market is in a sour mood and it’s hitting the TNA ETF hard. Could a turnaround be in store, though?
On a more favorable day, the Direxion Daily Small Cap Bull ETF has the potential to yield big results from small-cap stocks. In theory at least, TNA is an ETF that triples the price moves of a basket of small-cap stocks — but be sure to read the fine print before considering a share purchase.
Irrespective of today’s pullback in small caps, some experts might envision a boom in small-cap stocks, and perhaps you want to juice some extra profits if there’s a bounce-back. There’s no denying that a bet on small-cap growth might bring you amazing results. On the other hand, there are nuances to the Direxion Daily Small Cap Bull ETF that could impact your portfolio, so don’t miss out on these crucial details.
Take a Stake in Thousands of Stocks
Buying just one or two small-cap stocks, which typically represent small or medium-sized businesses, can be a dangerous proposition. You can mitigate the risks, however, by diversifying and owning tiny positions in many different small-cap stocks.
That’s the de-risking principle behind owning an ETF that follows the price movements of the Russell 2000, which is a basket of around 2,000 small-cap stocks. This index covers a variety of economic sectors, from financials and healthcare to real estate and consumer staples.
Thus, with the Direxion Daily Small Cap Bull ETF you’ll get portfolio exposure to the thousands of small-cap stocks in the Russell 2000 index. A few of the stocks in the TNA ETF’s holdings list include Fabrinet (NYSE:FN | FN Price Prediction), The Ensign Group (NASDAQ:ENSG), AeroVironment (NASDAQ:AVAV), and Brinker International (NYSE:EAT).
It’s fine if you’ve never heard of those companies, or even if some of them fail. With a couple of thousand stocks in its holdings list, the Direxion Daily Small Cap Bull ETF can withstand the failure of some of these small-cap businesses.
Extend Your Gains With TNA
Today’s not a great day for small caps, but a turnaround could happen at any given moment. On some days, small-cap stocks generally do well and the Russell 2000 might go up 1%. That’s pretty good, but the Direxion Daily Small Cap Bull ETF is triple-leveraged so it could gain not just 1% but 3% on a day like that.
And so, the TNA ETF offers advantages to its shareholders. First, it eliminates the need for stock picking since the fund’s management takes care of that. Second, it provides instant diversification into thousands of stocks.
In addition, the Direxion Daily Small Cap Bull ETF enables a small account to possibly achieve the gains of a larger account. After all, on a day when the Russell 2000 shoots higher, a triple-leveraged ETF like TNA is designed to magnify your returns.
The Costs of Easy Leverage
Be aware, though, that there are drawbacks to the Direxion Daily Small Cap Bull ETF. For one thing, the easy leverage comes with a cost as the TNA ETF imposes an expense ratio of 0.99%. This equates to a drag of nearly 1% of the share price per year.
Furthermore, the Direxion Daily Small Cap Bull ETF is only designed to triple the price move of the Russell 2000 index for a single day. If you hold the fund for more than a day, you may get unanticipated results.
To provide an example of what could happen, imagine if a triple-leveraged fund rallies 3% but then declines 3%, or alternatively, if it falls 3% and then rallies 3%. Interestingly, the share price would end up slightly lower than where it started.
This is a phenomenon known as volatility decay. It helps to account for the 14% year-to-date share-price gain of the Direxion Daily Small Cap Bull ETF.
That 14% gain might sound good until you do the math. This year so far, the Russell 2000 has rallied 11.5%. If the Direxion Daily Small Cap Bull ETF is triple-leveraged, shouldn’t it have rallied 3 x 11.5%, or 34.5%?
That’s not how the fund works. Its role is to attempt to provide 3x the price move of the Russell 2000 index for a single day. Beyond that, the TNA ETF could be susceptible to volatility decay. Plus, the Direxion Daily Small Cap Bull ETF will continue to impose an expense ratio of nearly 1%.
Tread Carefully With TNA
Today’s pullback in the Direxion Daily Small Cap Bull ETF is a perfect example of what can happen when the market is in a rough mood. Small caps get hit hard, the Russell 2000 pulls back, and the triple-leveraged TNA ETF sinks quickly; trying to time a recovery is a difficult task, to say the least.
Metaphorically speaking, we might compare TNA to TNT — highly explosive and dangerous if misused. Remember, the Russell 2000 could decline and if that occurs, the Direxion Daily Small Cap Bull ETF is likely to drop sharply.
It’s also possible for the Russell 2000 to rally on any given day, and then the TNA ETF will probably spike higher. That positive effect might only last for a day, though; after that, the results of the Direxion Daily Small Cap Bull ETF can be unpredictable.
Consequently, it’s wise to tread carefully with the Direxion Daily Small Cap Bull ETF. Treat it as an instrument for short-term trading, and carefully limit your position size with this fund. That way, you can use TNA responsibly and, if all goes well, turn a nice profit when small-caps make large moves.
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