The Xchange Blog

Will Europe’s Markets Outshine The Rest?

Nothing seems quite as certain now that volatility has returned to the markets. Though it spooked markets at first, it isn’t necessarily a bad thing. Volatility is normal. But there are other global headlines to be aware of that can potentially cause problems down the road. 

For one, China, perenially the world’s fastest-growing major economy, is actually contending with a slow down. In an attempt to add some fuel to the economic furnace, the country has allowed its debt burden to grow to what some say are “bubble proportions” as it tries to leverage itself away from stagflation.

Heading West there is the lingering specter of Brexit’s final, decisive blow that continues to wreak havoc on British politics and GDP. The split is already projected to lose the country £72 billion and, possibly, London’s status as a global financial hub.

To cap it all off investors and traders are also dealing with an oil market suffering from a supply glut originating in part from the U.S., once its biggest customer. That excess has already caused major downward pressure on price and, by extension, the economies of OPEC member nations and other oil export-reliant countries in the Middle East and Central/South America.

But these worldwide troubles haven’t stopped some from figuratively whistling past the graveyard. The European Union is experiencing an unfamiliar optimism as 2018 takes shape and the Euro begins to show signs of an upswing against a falling dollar, pound and renminbi. A large part of the enthusiasm in Europe comes from the fact that the European Union’s 19 member nations posted a combined GDP growth of 2.5 percent over 2017. Suddenly, for the first time in a long time, everything’s coming up Eurozone.

What is it that the EU has done so well to have their best year of economic growth since 2007? The answer, surprisingly, is: not much.

Mismatched ruling parties and austerity measures aside, the biggest asset the European Union has recently had over its global contemporaries is simply exhibiting a measure of stability. Brexit is the most obvious example of the European mainland’s relative constancy.

For European bank investors, the rise in Europe and diminishing presence of Britain in the financial sphere might actually prove fortuitous. British banks that remain headquartered on the isle like HSBC Holdings aren’t likely to lose continental business because of the split. Meanwhile, banks like BNP Paribas and ING Group may stand to do extremely well in a growing EU.

Those three banks are among the top holdings in the Daily MSCI European Financials Bull 2X Shares ETF (EUFL) and Daily FTSE Europe Bull 3X Shares ETF (EURL). HSBC is the second-largest holding in EURL, and together with BNP and ING, makes up over 18 percent of EUFL.

Then there is the U.S., which is coming out of a long-running bull market followed by a period of equity ecstasy after the last presidential election. That run in stocks not only drove corporate bonds higher, but also supercharged the dollar. At a certain point, there wasn’t much place for the dollar (or the market) to go but down, which they both certainly did in early February. And, while optimism remains high for solid economic times ahead, government spending is on the rise even though the tax base has been slashed. This leaves little sign as to how that widening deficit is going to be resolved as a badly needed infrastructure plan gets hammered out on Capitol Hill.

Contrast that with a European Union that is suddenly on the approach to becoming a unified economic ecosystem. As mentioned, European financials stand to come out very appealing as national bond prices between the member nations begin closing ranks. That, in addition to signs of stability in the once failing Greek economy, have made the EU look almost serene when compared to the volatile hysterics overlaying U.S. markets.

You can see how all three European Leveraged ETFs, including the  Daily EURO STOXX 50 Bull 3X Shares ETF (EUXL) have outperformed the S&P 500 in the last year (although EUXL lost ground to the index in early 2018).

EUFL, EURL, EUXL vs. S&P 500 Index

Data Range: 3/1/2017 – 2/28/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. 

 

What’s unusual is that Europe is historically more volatile than domestic markets. This is not currently the case from a realized volatility perspective. 

The chart below shows the historical realized volatility of the FTSE Developed Europe All Cap Index (used as a benchmark for EURL) compared to the S&P 500 over the last five years.

Volatility of the FTSE Developed Europe All Cap Index vs. S&P 500 Index

Data Range: 3/15/2017 – 2/28/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. One can not invest directly in an index.

 

Will there be new developments around Brexit issues, Italian elections, or new tariffs that move markets in Europe? The only thing that’s certain is change. And Direxion Leveraged ETFs that target European stocks allow sophisticated traders to be bold.  As always traders should monitor their trades often.  

 

Related Leveraged ETFs:

 


Performance (as of 12/31/2017)

Ticker Name   1-Mo % 3-Mo % YTD % 1Y % 3Y % S/I % Inception Expense Ratio (Gross/Net) %
EUXL Direxion Daily EURO STOXX 50 Bull 3X Shares NAV -4.52 -4.68       13.51 7/1/2017 3.36 / 1.18*
Market Price -4.52 -4.74       13.70
EURL Direxion Daily FTSE Europe Bull 3X Shares NAV 4.10 4.36 91.04 91.04 9.51 -0.97 1/22/2014 1.09 / 1.06*
Market Price 4.21 4.18 91.32 91.32 9.57 -0.97
EUFL Direxion Daily MSCI European Financials Bull 2X Shares NAV 1.55 -1.17 54.64 54.64   69.93 7/27/2016 1.57 / 1.09
Market Price 3.89 3.87 62.87 62.87   76.33

* The Net Expense Ratio includes management fees, other operating expenses and Acquired Fund Fees and Expenses. If Acquired Fund Fees and Expenses were excluded, the Net Expense Ratio would be 0.95% for EUXL and EURL, and 0.80%for EUFL. The Fund’s adviser, Rafferty Asset Management, LLC (“Rafferty”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the Fund for Other Expenses through September 1, 2019, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable, among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses). If these expenses were included, the expense ratio would be higher.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized. For the most recent month-end performance please visit the funds website at direxioninvestments.com.

Short-term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. Because of ongoing market volatility, fund performance may be subject to substantial short-term changes. For additional information, see the fund’s prospectus.

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at direxioninvestments.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.

Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged investment results and intend to actively monitor and manage their investment. The Direxion Shares ETFs are not designed to track their respective underlying indices over a period of time longer than one day.

Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with the Fund concentrating its investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. The Fund does not attempt to, and should not be expected to, provide returns which are three times the performance of its underlying index for periods other than a single day. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, Daily Index Correlation/Tracking Risk, Other Investment Companies (including ETFs) Risk, risks specific to European securities, such as European Economic Risk, risks specific to the Banking industry for EUXL; and for EUFL risks specific to the European financials sector. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.