Looking for an ETF to turn small caps into a small bank account? I’ve got it for you: The Direxion Daily Small Cap Bear 3X ETF ($TZA). This ETF is designed to give you daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the performance of the Russell 2000® Index. That is, three times the daily movement of small cap index that is the basis for $IWM.
The positives for this ETF?
- it makes outsized moves on a daily basis on small caps, so if you can accurately predict the daily moves, you can make three times what you would make from the IWM.
- small caps are pretty volatile, and the IWM does move quite a bit each day, the average daily difference from high to low since inception for this ETF is 5.1%!
- This ETF and its ilk can allow you to skirt margin rules, giving you three times the buying power without borrowing funds from your broker. Usually, you aren’t going to be able to margin $TZA, not fully.
I call this InTZAnity for a reason, because of the negatives:
- If you don’t predict this accurately, you can lose big for the same reasons as 1 above. Remember, if you lose 110% (not out of the question in day on this crazy ETF) you need to make back 12.5% to get back to even.
- Like all these leveraged ETFs, it loses value over time in conjunction with its companion Bull ETF, $TNA. Look a one year graph of $TZA and $TNA against each other. Under normal circumstances, both graphs slowly deteriorate over time… Holding this over extended period, like more than a week, is like swimming against the stream; you may get somewhere, but it’s going to be a lot harder
- Small caps have been one of the best investments over the long run. By buying $TZA you are making a bet the small caps will decline. Why? Are you that sure you can predict that this is the time the overall market will dive? If so, can you let me know?
So, you can trade this on a daily basis, try to get it right and racking up substantial commissions or you can stay away from it completely and concentrate on something sensible, or you can try to short it over the long term. Yes, essentially, short a short. DISCLOSURE: that is my current position, I am short $TZA, planning for the long haul.
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