Direxion Daily Small Cap Bear 3X Shares (TZA): The Quick Guide to TZA

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Investors often prize small-cap stocks — those equities with market capitalizations between $300 million and $2 billion — for robust growth. However, small caps are no free lunch, and the “lunch fee” comes in the form of volatility and outsize risk. Imagine the potential potency and the potential for elevated risk by adding leverage to small-caps. Such are the rewards and risks with leveraged ETFs such as the Direxion Daily Small Cap Bear 3X Shares (NYSEARCA:TZA).

Direxion Daily Small Cap Bear 3X Shares (TZA): The Quick Guide to TZADirexion is the second-largest issuer of inverse and leveraged ETFs. And its TZA attempts to deliver triple the daily inverse returns of the Russell 2000 Index — one of the most widely followed gauges of U.S. small-caps.

Along with its bullish counterpart, the Direxion Daily Small Cap Bull 3X Shares (NYSEARCA:TNA), these seek “a return that is 300% or -300% of the return of their benchmark index for a single day, according to Direxion. The funds should not be expected to provide three times or negative three times the return of the benchmark’s cumulative return for periods greater than a day,” the sponsor notes.

TZA and Leverage

As is the case with other leveraged ETFs, TZA’s potential to deliver big gains in short time frames is a source of its allure. In a perfect world, if the Russell 2000 falls 1% on a particular day, TZA rises 3%. The Russell 2000 has a standard deviation of 15.7%, which is about 530 basis points above the comparable metric on the S&P 500. That underscores the point that small-caps on their own are volatile, and adding leverage to that equation merely adds more risk.

Unfortunately, traders have made the mistake of holding the TZA for longer than a few days, exposing themselves to substantial risks and losses along the way. Before embracing it — or any leveraged ETF, for that matter — traders should fully understand how these products deliver leverage.

“To obtain the necessary exposure, Direxion Shares will invest all or a portion of their net assets in derivatives — typically swaps or futures,” Direxion says. “These derivatives are agreements that provide the ability to gain exposure to respective indexes and sectors without the need for full dollar-for-dollar investment.”

Average daily dollar volume on TZA is more than $576 million, meaning it is one of the most heavily traded broad-market leveraged ETFs. That keeps spreads tight and transaction costs fair. But do not hold this ETF for weeks or months. Some of the largest holdings at the moment are Kite Pharma Inc (NASDAQ:KITE) and Bluebird Bio Inc (NASDAQ:BLUE). No holding represents more than 0.3% of the fund’s overall weight at the moment.

As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.

Todd Shriber has been an InvestorPlace contributor since 2014.


Article printed from InvestorPlace Media, https://investorplace.com/2017/09/direxion-daily-small-cap-bear-3x-shares-tza-the-quick-guide/.

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