Save for the notable exception of General Electric, 2017 was an all around solid year for the industrial sector on the surface. Looking at the top holdings of the Industrial Select Sector Index, the benchmark index for the Direxion Daily Industrials Bull 3X ETF (DUSL), seven of the top 10 highest-weighted stocks were up at over 28 percent for the year as of Dec. 21 (compared to a 20 percent gain in the S&P 500).
Industrial Select Sector Index Top Ten Holdings, and Sector Weightings
Index data as of 12/31/2017. Source: Bloomberg. Index sector weightings and top holdings are subject to change.
The Trend Has Been DUSL’s Friend
The Direxion Daily Industrials Bull 3X ETF, which seeks daily investment results, before fees and expenses, of 300% of the performance of the Industrial Select Sector Index; has benefited from positive compounding since its inception last May.
Data Range: 5/1/2017 – 12/31/2017. 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. Returns for performance under one year are cumulative, not annualized.
But looking ahead to 2018, the industry is facing some potential headwinds worth keeping an eye on. Namely, the risk of fewer government contracts and less public spending. While infrastructure and defense companies both once seemed like mortal locks to get funding from a “pro-growth” government led by an administration that campaigned on a “historic” $1 trillion infrastructure plan, that now seems a little less likely now.
Why? Tax reform. Beyond what the overhaul may or may not do for business or GDP growth, the changes to the tax code will add about $1.4 trillion to the national deficit and narrower the U.S. tax base. Historically, these types of tax cuts (under Reagan in ‘81, ‘86 and under Bush in ‘01) have resulted in a decrease in proportional spending on infrastructure. Moreover, the increase also gives fiscally conservative lawmakers something even more alarming to point to when considering additional spending, namely the deepening of an already very deep hole that is the national debt.
Couple the shrinking budget for massive infrastructure with a Congress that has struggled trying to pass major legislation of any kind and you might see why the engines of industry might be better off shifting into low gear over the next few months or risk stalling in hopes of badly needed public works contracts. While military spending might seem to be on pace for further growth, the federal budget is a bipartisan dance, and Democrats can also play the deficit game.
While it still remains to be seen what the true implications of the new tax legislation will be—general consensus on Wall Street is it may be good for small cap assets, like the Direxion Daily Small Cap Bull 3X ETF (TNA)—2018 may be a time to wait and see if the industrial sector will get the spending it was once promised.
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Performance (as of 9/30/2017)
|Ticker||Name||1-Mo %||3-Mo %||S/I %||Inception||Expense Ratio (Gross/Net) %|
|DUSL||Direxion Daily Industrials Bull 3X Shares||NAV||5.75||20.368||46.70||5/3/2017||1.09 /1.08*|
* 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%. The Fund’s Adviser, Rafferty Asset Management, LLC (“Rafferty”) has entered into an Operating Expense Limitation Agreement with the Fund, under which Rafferty has contractually agreed to cap all or a portion of its management fee and/or reimburse the Fund for Other Expenses through September 1, 2018, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s daily net assets other than the following: 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 and risks specific to investment in the securities of the Industrials Sector. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.
Industrials Select Sector Index (IXITR) – The index is provided by S&P Dow Jones Indices and includes domestic companies from the industrials sector which includes the following industries: aerospace and defense: industry conglomerates; and machinery. One cannot directly invest in an index.