Market Overview

Be Sharp With A Falling Knifes ETF

Share:

The idea of catching falling knives – stocks that being battered and bruised – is inherently risky and, in many cases, viewed as a strategy many do-it-yourself investors should pass on.

What Happened

However, there is some allure with embracing beaten up equities because, put simply, not all remain downtrodden. The Direxion Fallen Knives ETF (NYSE: NIFE) makes this strategy easier on investors.

NIFE, which debuted in June, tracks the Indxx US Fallen Knives Index. The Direxion ETF proves there's something to the fallen knives strategy when properly executed, Since inception, NIFE is up 28.80%, outpacing the S&P 500 by about 1,100 basis points.

Why It's Important

“When a stock falls, there are of course reasons. For example, a stock’s price can plunge if the company must report falling profits or is rocked by a scandal. Instead of grasping blindly at falling knives, investors should first analyse carefully what the prospects are of the company posting profits again soon,” according to Deutsche Bank research.

NIFE does what many intend to with falling knives. The fund goes beyond sheer price declines. Yes, NIFE's underlying index “systematically identify stocks that have fallen in price significantly in the past 12 months.”

However, the benchmark goes a step further by evaluating those names based on financial health because, not surprisingly, financially sturdy fallen knives have better odds of rebounding.

“This is a familiar dilemma for fund professionals. With stock-market favourites in particular, investors often expect stocks to return to their old price levels sooner or later,” notes Deutsche Bank. “To make matters worse, there often are sharp counter-movements after a downwards slide. For many investors, this reinforces their view that a trend reversal has begun.”

What's Next

There are obvious ways NIFE can build on its strong start. For starters, the financial services represents nearly a third of the funds weight so if the Federal Reserve finally allows the group to buyback stock and grow dividends, the ETF is poised to benefit and that's the catalyst for that sector because interest rates aren't rising anytime soon.

Second, healthcare is a quarter of the fund's weight and that sector, according to Goldman Sachs, is as attractively valued as it's been in years. Should investors take that bait, particularly as good news on the coronavirus vaccine front emerges, NIFE would have another tangible tailwind at its back.

 

Related Articles (NIFE)

View Comments and Join the Discussion!

Posted-In: direxionLong Ideas News Broad U.S. Equity ETFs Specialty ETFs Trading Ideas ETFs