Matt Frankel, The Motley Fool
6 min read
In This Article:
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The Direxion Daily Small Cap Bull 3X Shares ETF is a triple-leveraged small-cap ETF.
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If the Russell 2000 performs well, it could deliver incredible returns.
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There are some big risk factors, so it’s important to know what you’re getting into.
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If you're bullish on small-cap stocks, it might seem like a good idea to buy shares of a leveraged ETF like the Direxion Daily Small Cap Bull 3X Shares ETF (NYSEMKT: TNA) in order to magnify your returns.
Of course, this could certainly work out well if the index goes on an incredible bull run, but it's also important to know what happens if it doesn't. We'll look at some of the reasons why you might want to buy shares of this triple-leveraged index fund, and why it might be a better idea to approach it with caution.
The Direxion Daily Small Cap Bull 3X Shares ETF uses derivative securities in order to produce three times the daily return of the Russell 2000 index. If you aren't familiar with it, the Russell 2000 is perhaps the most widely used small-cap stock index. The Russell 3000 is a total market index, and the Russell 2000 includes the 2,000 smallest companies in it.
In other words, if the Russell 2000 rises by 2% tomorrow, the Direxion Daily Small Cap Bull 3X Shares ETF should rise by about 6%.
To be perfectly clear, this is designed as a short-term investment vehicle. There is nothing preventing you from owning the ETF for a long period of time, but as we'll see in a bit, the mathematics aren't favorable, unless the Russell 2000 goes on an incredible bull run.
The most obvious reason to consider the Direxion Daily Small Cap Bull 3X Shares ETF is for its performance potential. While the long-term mathematics typically don't work out to an exact 3X multiple, if the Russell 2000 rises by, say, 20% next year, there's a good chance that this ETF will produce very strong returns.
Second, using a leveraged ETF is far easier than setting up a leveraged investment on your own with things like futures contracts and index options. There's a significant cost (more on that in the next section), but the fund managers are doing the heavy lifting for sure.
Because of the triple-leveraged nature of the Direxion Daily Small Cap Bull 3X Shares ETF, it is naturally going to be more volatile than a standard Russell 2000 ETF. This is true whether the investment is going well or not.
