The Xchange Blog

Trading Inflation

Well, the market is finally awake. After two full years of a sub-30 VIX, we finally have some volatility. For traders, this is a sight for sore eyes.

The brief sell-off we experienced in early February was attributed to normal market correction behavior. But it seems like for the first time in a while investors are considering the possibility of an inflationary environment down the road. And with all signs pointing to more interest rate hikes ahead, the economy appears to be churning along.

As for whether we’re in an inflationary environment, well, that’s up for debate. Inflation, of course, indicates the end of a growing economy. Here are a few ways to hedge against that shift, whenever it does occur.

Trading Inflation: Gold and Gold Miners

Gold has always been considered one of the most reliable hedges against inflation—it’s one of the most popular hedges period.

Though this commodity has underperformed recently, and no two economic retractions are created equal, the precious metal remains the headliner when it comes to hedging.

Look at how the Direxion Daily Gold Miners Index Bull 3X ETF (NUGT) and Direxion Daily Gold Miners Index Bear 3X ETF (DUST) have performed over the last quarter. NUGT is in blue, DUST is in orange.

Trading Inflation: Gold Miner Funds ETFs
Data Range: 12/15/2017 – 3/15/2018. 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. 

 

Note the uptick in the bullish NUGT fund in mid-February when the market experienced a real taste of volatility.

Similarly, look at the performance of the Direxion Daily Junior Gold Miners Index Bull 3X ETF (JNUG) (blue line) and Direxion Daily Junior Gold Miners Index Bear 3X ETF (JDST) (orange line). The bullish JNUG experienced the same type of movement in early February.

Trading Inflation: Junior Gold Miner Funds ETFs
 Data Range: 12/15/2017 – 3/15/2018. 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. 

 

Trading Inflation: Real Estate

Real Estate is another well-known hedge against inflation because property values tend to rise in inflationary environments. It follows the same principle as gold and other commodities; there’s a finite supply and, therefore, increased demand in times of uncertainty.

Investors seem to be making real estate part of their strategy. As of March 15, the Direxion Daily MSCI Real Estate Bull 3X ETF (DRN) had nearly $39 million of inflows in 2018, while the Direxion Daily MSCI Real Estate Bear 3X ETF (DRV) had about $1 million of outflows.

There will be, of course, other assets that won’t necessarily move in lockstep with the overall market during a correction. But by and large, gold and real estate have historically been the most consistent hedges against volatility. Remember this the next time the market sells off.  

 

Related Leveraged ETFs:

 


Performance (as of 12/31/2017)

Ticker Fund Name   1 Mo % 3 Mo % YTD 1 YR % 3 YR % 5 YR % Inception Inception Expense Ratio
(Gross/Net) %

NUGT

Daily Gold Miners Index Bull 3X Shares NAV -30.28 -20.31 -28.97 -40.32 -43.58 -60.00 -59.43 12/8/2010 1.20 / 1.20
Market Close -29.76 -19.72 -28.23 -40.01 -43.38 -59.95 -59.37

DUST

Daily Gold Miners Index Bear 3X Shares NAV 32.58 5.62 21.17 -13.98 -64.81 -53.90 -38.38 12/8/2010 1.06 / 1.08
Market Close 32.12 5.10 20.97 -13.98 -64.86 -53.94 -38.42

JDST

Daily Junior Gold Miners Index Bear 3X Shares NAV 17.32 -8.52 17.11 -13.41 -79.62 -75.64 10/3/2013 1.07 / 1.10
Market Close 17.28 -8.54 17.07 -13.39 -79.61 -75.61
JNUG Daily Junior Gold Miners Index Bull 3X Shares NAV -21.82 -10.48 -27.45 -58.84 -39.50 -60.42 10/3/2013 1.18 / 1.18
Market Close -21.55 -10.12 -27.03 -58.58 -39.38 -60.35

* 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 0.90% for JNUG and NUGT, 0.95% for JDST, and 0.94% for DUST. The Funds’ adviser, Rafferty Asset Management, LLC (“Rafferty”) has entered into an Operating Expense Limitation Agreement with each Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse each 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.

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.