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Bold, Bearish Bets Against Small-Caps

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June 13, 2018 11:05 am
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Bold, Bearish Bets Against Small-Caps

Recently, smaller stocks and the related exchange traded funds (ETFs) have been the talk of the town. That adulation is well-deserved. Over the past month, the widely followed Russell 2000 Index is higher by nearly 5 percent, extending its year-to-date gain to almost 10 percent.

On Tuesday, nearly 30 small-cap ETFs, including some leveraged funds, hit all-time highs. While the amount differs from day-to-day, a batch of small-cap funds have recently been hitting record highs on an almost daily basis.

What Happened

Of course, small-cap strength is benefiting the Direxion Daily Small Cap Bull 3X Shares (NYSE:TNA). TNA attempts to deliver triple the daily returns of the Russell 2000 Index. This Direxion ETF is a favorite among aggressive, short-term traders looking for broader exposure to domestic small-caps.

Like any leveraged ETF, TNA should not be held for more than a day or two, but its one-month gain is undoubtedly seductive at north of 14 percent.

Why It's Important

Data suggest traders are not looking to marry TNA. While the triple-leveraged small-cap ETF has been surging, traders have been taking profits. Over the past month, TNA is averaging daily outflows of $5.95 million, a total surpassed by just two other of Direxion's triple-leveraged ETFs, according to issuer data.

Alright, so departures from a leveraged ETF that is rallying are not uncommon. In fact, that is what smart traders do with these products. Take profits, close positions and assess other opportunities.

Other opportunities are being assessed…with TNA's bearish counterpart. The Direxion Daily Small Cap Bear 3X Shares (NYSE:TZA). TZA is designed to deliver triple the daily inverse returns of the Russell 2000. Over the past month, traders have been pouring into TZA to the tune of $2.22 million per day, on average, according to Direxion data.

What's Next

The TZA bet is risky, particularly with smaller stocks showing broad strength on a daily basis. It is just speculation, but traders could be looking for short-term pullback by small-cap benchmarks for some quick profits in TZA. That thesis will be tested as TZA is off 3.20 percent over just the past week.

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