How The Market's Volatility Is Shaking Out In Leveraged ETFs

The third quarter earnings season is in full swing, with the busiest week of earnings upon us.

But what makes this earnings season unique is it has been accompanied by a bought of volatility that, to be frank, is rather unusual in this market. Not only has the VIX reached levels not seen since the end of March, but the market has officially given back all its 2018 gains.

While it’s likely causing headaches for investors, this general market/earnings volatility is a dream for traders, especially ones who use daily trading strategies.

“As short-term traders, you like when there’s volatility because it gives you a chance to be more tactical in your trading,” said Sylvia Jablonski, managing director of leveraged ETF provider Direxion ETFs. “And it lets you use active trading tools like leveraged products to gain more exposure or hedge yourself.”

Jablonski was quick to note that leveraged ETFs, like those at Direxion, are short-term vehicles only and shouldn’t be held for more than a few days. But they can be used around news catalysts by traders making a call on a whether a stock or sector will go up or down.

Over the past few weeks, for instance, she said that traders had been active in the Direxion Daily FTSE China 3X Bull and Bear Shares YINN YANG as the country’s weakness has seemed to spearhead the sell-off in U.S. equities.

“When we see a lot of traders coming in and out of funds like that, it’s a signal that we should watch for volatility in the sector because a lot of traders are paying attention.”

Jablonski also she’s observed a lot of attention recently in the Direxion Daily Gold Miners Index Bull and Bear 3X Shares NUGT DUST, which she said was not surprising considering gold’s longstanding use as a hedge.

Looking ahead to next week’s earnings slate, the Direxion Daily Technology 3X Bull and Bear Shares TECL TECS and Direxion Daily Energy Bull and Bear 3X Shares ERX ERY will likely experience more activity, as some of the top holdings in those funds report earnings.

In technology, Mastercard Inc MA and Apple Inc AAPL, which report Tuesday and Thursday respectively, make up 24 percent of the Technology Select Sector Index tracked by TECS and TECL.

In energy, Exxon Mobil Corporation XOM and Chevron Corporation CVX, which are the two largest holdings and make up nearly 40 percent of the Energy Select Sector Index, will report Thursday afternoon. So traders can more volatility in those stocks and corresponding ETFs.

“We typically see a lot of attention paid to our leveraged sector products in the run-up to earnings,” said Jablonski. “And that can even last a few days after a big earnings report depending on the strategy. I would expect that to be the case through the rest of this earnings season.