The Top 5 Direxion Funds for Daring Traders

These Direxion ETFs can deliver big short-term gains, but they are trades, not investments.

Source: Myo Kyaw Htun via Flickr

Direxion is one of the largest issuers of leveraged exchange-traded funds (ETFs), those products that have the power to seduce with the potential for outsized short-term gains but can also be ruinous if held for too long.

To be fair, not every Direxion fund is inverse or highly leveraged. The firm offers several smart-beta ETFs as well as some lightly leveraged (1.25x) funds for traders who want just a little bit of extra juice.

Over the years, leveraged ETFs, regardless of issuer, have generated copious amounts of controversy, most of which can be tied to traders tempting fate and turning a short-term instrument into a long-term investment. Issuers of these products, including Direxion, make strong efforts to inform market participants that leveraged ETFs are trades, not investment.

Leveraged ETFs “seek daily goals and should not be expected to track the underlying index over periods longer than one day,” said Direxion. “They are not suitable for all investors and should be utilized only by investors who understand leverage risk and who actively manage their investments.”

For example, the Direxion Daily S&P 500 Bull 3X Shares (NYSEARCA:SPXL), a popular Direxion ETF, should rise 3% on a day when the S&P 500 gains 1%. Over months and years, the ballgame is different for leveraged ETFs and potentially perilous to investors’ outcomes.

Oh yeah, leveraged ETFs are expensive to hold for the long-term as well. Many Direxion ETFs have annual fees of 1% or more.

For those who can actively monitor their trades, here are five Direxion ETFs with compelling near-term potential.

Direxion Funds: Direxion Daily Small Cap Bull 3X Shares (TNA)

Expense Ratio: 1.1%

The Direxion Daily Small Cap Bull 3X Shares (NYSEARCA:TNA) is designed to deliver triple the daily returns of the widely followed Russell 2000 Index. Recently, small-caps have been a winning bet, a fact reflected by TNA’s one-month gain of 19% (as of June 6). Some anecdotes suggest traders are comfortable betting on more upside for small-caps.

On June 6, more than 33 small-cap ETFs hit all-time highs. This Direxion ETF was is one of those funds. A key element to effectively using leveraged ETFs is finding asset classes that are naturally volatile, and small-caps fit the bill. While not excessive, the three-year standard deviation on the Russell 2000 is much higher than that of the S&P 500.

TNA’s bearish counterpart is the Direxion Daily Small Cap Bear 3X Shares (NYSEARCA:TZA).

Direxion Funds: Direxion Daily Regional Banks Bull 3X Shares (DPST)

Expense Ratio: 1.16%

Active traders know that the Federal Reserve can be a trader’s friend … or foe. While there are never any guarantees with the Fed, the path of least resistance appears to be that the central bank will continue boosting interest rates.

Enter the Direxion Daily Regional Banks Bull 3X Shares (NYSEARCA:DPST). Why this Direxion ETF? Why now? Regional banks are among assets most positively correlated to rising rates because those higher rates boost net interest margins. Nimble traders looking for Fed meeting trading ideas can do worse than this Direxion ETF.

DPST attempts to deliver triple the daily returns of the S&P Regional Banks Select Industry Index.

Direxion Funds: Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares (DRIP)

Expense Ratio: 1.07%

In addition to offering an extensive lineup of leveraged bull funds, Direxion features plenty of leveraged inverse ETFs as well, including the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares (NYSEARCA:DRIP).

Remembering that leveraged ETFs are best used as short-term trades, this Direxion ETF can be used by savvy traders on days when oil inventories data is reported or around the time of Organization of Petroleum Exporting Countries (OPEC) meetings, among other short-term events.

The word of caution with DRIP is that the index it seeks to deliver triple the daily inverse returns of, the S&P Oil & Gas Exploration & Production Select Industry Index, is up 21% over the past 90 days. Translation: DRIP is never a buy-and-hold investment, particularly when oil prices are rising.

Direxion Funds: Direxion Daily CSI China Internet Index Bull 2X Shares (CWEB)

Expense Ratio: 1.36%

The potency of China internet stocks and ETFs is well-documented. The Direxion Daily CSI China Internet Index Bull 2X Shares (NYSEARCA:CWEB) attempts to deliver double the daily returns of the CSI Overseas China Internet Index.

That index can deliver big gains in short time frames, as highlighted by its one-month gain of 7%.

Aggressive, short-term traders can find use for this Direxion ETF around the earnings reports of Alibaba Group Holding Ltd (NYSE:BABA), Baidu Inc (ADR) (NASDAQ:BIDU) and Inc(ADR) (NASDAQ:JD), among other China internet giants. Those three stocks combine for almost 22% of the CSI Overseas China Internet Index’s weight.

Direxion Funds: Direxion Daily MSCI Real Estate Bear 3X Shares (DRV)

Expense Ratio: 1.09%

Among the sectors that are negatively correlated to rising interest rates, real estate is a big one. Not surprisingly, real estate is one of this year’s worst-performing groups, but that could be good news for the Direxion Daily MSCI Real Estate Bear 3X Shares (NYSEARCA:DRV).

Underscoring the risks associated with holding leveraged ETFs for long periods of time, this Direxion ETF is sporting a negligible year-to-date gain. DRV’s potency is derived from short-term trading events, such as Fed meetings with hawkish minutes or an outright rate hike. This Direxion ETF seeks to deliver triple the daily inverse returns of the MSCI US REIT Index.

As of this writing, Todd Shriber does not own any of the aforementioned securities.

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