Bet on Wild Swings in the Market With the SPXL ETF

In 2020 the stock market has been prone to wild swings. If you want to bet on the swing up, but you do not know precisely what stocks may lead the charge, you can do it with an exchange-traded fund. Specifically, you can make that bet with the Direxion Daily S&P 500 Bull 3X Shares (NYSEARCA:SPXL) stock.

A traffic light flashes green in front of Wall Street.

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As the market has surged since March, SPXL stock has worked like a charm. The ETF was trading at $17.55 on March 23. It entered trade yesterday morning at $60.

But this is not a buy-and-hold fund. In mid-June it dropped 20% within a couple of days, from over $47 to just $39. This is a trader’s tool, something you get into, and out of, to ride momentum.

How SPXL Stock Works

SPXL stock is designed to give you three times the gains of the S&P 500, measured by the SPDR S&P 500 ETF (NYSEARCA:SPY), over the short term. It does this by investing in stocks that rise fast when the market is hot.

This year it has been heavily into the leading cloud companies — Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). My portfolio has been heavy on these names as well, and I have ridden them to big gains.

SPXL managers currently balance the cloud companies with some other big names that tend to go up with the market, like Johnson & Johnson (NYSE:JNJ), Procter & Gamble (NYSE:PG) and Visa (NYSE:V). Overall, the fund is heaviest in information technology, healthcare and consumer discretionary stocks.

The fund doesn’t just buy stocks. It uses leverage to maximize gains, things like derivatives and swaps. Exposure is adjusted daily. A leveraged ETF isn’t trying to beat the market over the long run, but to beat daily performance.

How to Use the Direxion ETF

As InvestorPlace’s Todd Shriber noted in July, it’s leverage that makes SPXL a sub-optimal investment. The daily resets mean you’re going down faster on bad days, just as they mean you’re going up faster on good days.

Because it’s using leverage, and because the managers are active traders, their expenses are higher than with other funds. The managers are taking 1.01% of the assets in an average year, which is more than twice that of the average ETF.

That’s why, when he looked at SPXL in May, InvestorPlace’s Chris Markoch warned people away from it. You’re placing a big bet on the whole market. The managers are taking a big piece of your money.

But if you feel certain about a near-term move up, it may be worth the gamble. Since late July, for instance, the S&P 500 has marched higher nearly every day, going from a little over 3,200 to over 3,500. Derivatives and swaps on the companies leading the charge would maximize those gains.

Microsoft, for instance, is up 23% over the last three months. Had you bet on its daily moves upwards, you’d be sitting pretty. With SPXL, you’re paying someone to do that for you.

The Bottom Line

With SPXL stock you’re buying volatility in one direction — up.

That means a sudden downdraft is going to burn you badly.

That is the risk you take. You must watch the market closely and decide every day whether your bet on good times should stay on. You can’t fall in love with SPXL. You need to get in and get out in a hurry.

Now, when you read that paragraph did your mouth water? Did you get an adrenaline rush? In that case SPXL might be a card worth playing.

If, like me, your stomach got tight and your hands got clammy, don’t go to the dog track with SPXL. Adopt a greyhound and make a friend instead.

On the date of publication, Dana Blankenhorn held a long position in MSFT, AAPL and AMZN.

Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.

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