Skip to Main Content
  • Search by ticker
  • Sign up for emails
  • Contact Us
  • 866-476-7523
xchange logo

Could Small Caps Be Cooking Up Something BIG?

June 15, 2022

Editor’s note: Any and all references to timeframes longer than one trading day are for purposes of market context only, and not recommendations of any holding timeframe. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don’t have the resources, time or inclination to constantly monitor and manage your positions, leveraged ETFs are not for you.

Compared to their large-cap peers, the small cap sector of the equity market has underperformed notably over the past few months.  From an even longer-term perspective, the entire small cap sector hasn’t been this inexpensive compared to large caps in about 20-years.  This creates a unique opportunity from an arbitrage standpoint – could this lagging sector within equities finally catch up?

The Small Cap Revival Case

Many small cap stocks are domestically-oriented. That is, most of their business is focused within the United States. On the other hand, large cap stocks are typically multi-national entities with business affairs across the globe. The macroeconomic environment has recently evolved in such a manner that could start to favor small cap stocks. Historically, a stronger U.S. Dollar led to outperformance by small caps. However, this hasn’t been the case in the last year, but that could be on the cusp of changing, especially if recession fears retreat and inflationary pressures are quelled. For traders looking to take a position according to this historical relationship, Direxion offers the Daily Small Cap Bull 3X Shares (Ticker: TNA) fund, which tracks 300% of the daily upside of the Russell 2000 Index.*

Below is a daily chart of TNA as of June 9, 2022:

Source: TradingView.com

Candlestick charts display the high, low (stick), open, and closing prices (body) of a security for a specific period.

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. For the most recent month-end performance go to Direxion.com/etfs. For standardized performance click here.

Inflation and Recession Risks

Despite some signs that small cap shares could be due for a bounce, there remain serious economic issues with respect to recession risk and multi-decade high inflation that could continue to plague the sector. Not to mention that small caps have been leading the overall equity market lower during this latest correction. For traders that deem the risks outweigh the opportunities in the small cap space, Direxion offers the Daily Small Cap Bear 3X Shares (Ticker: TZA) fund, which tracks 300% of the daily downside of the Russell 2000 Index.

Below is a daily chart of TZA as of June 9, 2022:

Source: TradingView.com

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. For the most recent month-end performance go to Direxion.com/etfs. For standardized performance click here.

Notable Small Cap Sectors

The top 3 largest sectors within the Russell 2000 are healthcare, financials, and industrials.  A renewed bull run in these three sectors could prove to be a catalyst for a strong bounce in small caps, but on the other hand, persistent weakness in these sectors would bolster the bearish case.  Rising rates were historically bullish for financials, although this correlation hasn’t held up in the past year, perhaps due to the inflation rate being too high.  When it comes to industrials, the sector is in a unique position to pass down higher input costs onto customers, but of course, this assumes demand remains constant, which is always uncertain when inflation is rampant.

For traders looking to stay nimble in some of the most volatile markets we’ve seen in years, Direxion is with you.  You know that TRADING is different than investing. But the opportunity to take advantage of short-term trends is only won, if you get the direction right. Stay nimble, and monitor your Leveraged ETF positions frequently.

*Definition: The Russell 2000 index is a market index comprised of 2,000 small-cap companies.

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 www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.

Leveraged and inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.

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, or daily inverse leveraged, investment results and intend to actively monitor and manage their investment.

The Russell 2000® Index is a trademark of Frank Russell Company (“Russell”) and has been licensed for use by the Trust. The Direxion Daily Small Cap Bull and Bear 3X Shares are not sponsored, endorsed, sold or promoted by Russell. Russell makes no representation regarding the advisability of investing in the Direxion Daily Financial Bull and Bear 3X Shares.

Direxion Shares Risks – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their 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. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk, and risks specific to investment in micro-cap, small- and/or mid-capitalization securities. Investing in micro-capitalization companies are significantly more volatile as they face greater risk of business failure than companies considered small and/or mid-capitalization companies. Investing in small and/or mid-capitalization securities involves greater risks and the possibility of greater price volatility than investing in larger, more-established companies. Additional risks include, for the Direxion Daily Small Cap Bull 3X Shares, Daily Index Correlation Risk, and for the Direxion Daily Small Cap Bear 3X Shares, Daily Inverse Index Correlation Risk, and risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.

Distributor: Foreside Fund Services, LLC.

  • Small Cap ETFs (TNA | TZA)
  • Leveraged & Inverse ETFs
  • XChange Blog