Small-cap stocks and exchange-traded funds surged to start 2019, but the widely followed Russell 2000 Index is lower by more than 4 percent over the past week.
Some market observers are advising caution on the small-cap trade and that could increase the allure of bearish strategies.
What Happened
Such strategies include the Direxion Daily Small Cap Bear 3X Shares TZA, the premier inverse leveraged small-cap ETF. TZA is designed to deliver triple the daily inverse returns of the Russell 2000 Index.
Entering Monday, TZA was higher by 13.41 percent over the past week and was the fourth-best bearish fund in Direxion's stable on a month-to-date basis.
“Global small cap stocks have had a strong 2019 so far, outperforming large caps by more than three percentage points,” said BlackRock in a recent note. “This is not a rally worth chasing, in our view.”
Why It's Important
If market participants renew their affinity for defensive sectors and market capitalization segments, that could weigh on small-cap strategies, which typically tilt toward more cyclical sectors.
“Their sector composition is slightly more cyclical, with greater representation in sectors such as construction, real estate and manufacturing,” said BlackRock. “This means they are more sensitive to changes in economic activity.”
The Russell 2000, the index TZA attempts to deliver triple the daily inverse returns of, is highly cyclical. Four of its top five sector weights can be considered cyclical sectors. Those sectors, financial services, industrials, technology and consumer discretionary, combine for approximately 60 percent of the benchmark's weight.
What's Next
Data suggest some tactical traders are taking advantage of the opportunity to get bearish on small caps with TZA.
For the five-day period ended Friday, March 8th, volume in TZA was more than 42 percent above the trailing 20-day average, according to Direxion data. Additionally, inflows to TZA over the previous 10 days equaled 9.30 percent of the fund's assets under management, good for one of the top 10 totals among Direxion's leveraged ETFs during that period.
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