TZA: Tempting To Time, But Avoid It
Summary
- Shorting the stock market carries substantial risks and requires perfect timing, making it difficult for traders to profit.
- Direxion Daily Small Cap Bear 3X Shares ETF is a leveraged ETF that aims to provide three times the inverse return of the Russell 2000 Index.
- Investing in the TZA ETF involves significant risks due to leverage, volatility, and the nature of small-cap stocks, making it a challenging investment to time correctly.
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Don't be afraid to have a reality check. Taking risks is OK, but you must be realistic. - Joy Mangano
I've written about the risks of shorting on numerous occasions and using inverse funds to make a directional bet. The reason here is simple, though hard for people to appreciate until they've attempted shorting over their trading careers. The problem with betting directionally against the stock market is that your timing has to be perfect. Because markets tend to rise over time, and because declining markets act much faster than advancing ones, whipsaw risk is substantial, and your loss is theoretically unlimited (different with an inverse long-only fund, obviously).
Having said that, I have no doubt that there will be a resurgence of active trading in inverse ETFs given the heightened risks I believe are starting to come to fruition right now. To that end, let's talk small-caps, and specifically the Direxion Daily Small Cap Bear 3X Shares ETF (NYSEARCA:TZA). This is a leveraged exchange-traded fund, or ETF, that seeks to achieve daily investment results, before fees and expenses, of 300% of the inverse performance of the Russell 2000 Index (RTY). Essentially, it is designed to provide three times the inverse return of the index for a single day.
The Russell 2000 Index measures the performance of approximately 2,000 small-capitalization companies within the Russell 3000 Index, based on their market capitalization. It's important to note that investing directly in an index is not possible, so instruments such as TZA offer an alternative method for gaining exposure to these market segments.
Fund Information
TZA was introduced by Direxion, a well-known asset management firm, on November 5, 2008. The fund has the following key characteristics:
| Fund Symbol | Daily Target | Intra-Day Value | Benchmark Index | Security Identifier | Expense Ratio (Gross/Net %) | Inception Date |
|---|---|---|---|---|---|---|
| TZA | -300% | TZA.IV | RU20INTR | 25460E232 | 1.03 / 1.03* | Nov 05, 2008 |
The Net Expense Ratio includes management fees, other operating expenses, and Acquired Fund Fees and Expenses. However, if Acquired Fund Fees and Expenses were excluded, the Net Expense Ratio would be 0.91%.
ETF Holdings & Sector Weightings
Some of the top holdings in the TZA fund include Super Micro Computer Ord, Rambus Ord, Sps Commerce Ord, and Chart Industries Ord, among others. The sector weightings of the fund are as follows:
| Sector | Weightage |
|---|---|
| Industrials | 17.45 |
| Health Care | 16.87 |
| Financials | 14.97 |
| Information Technology | 13.62 |
| Consumer Discretionary | 10.55 |
| Energy | 6.79 |
| Real Estate | 6.19 |
| Materials | 4.61 |
| Consumer Staples | 3.44 |
| Utilities | 3.02 |
| Communication Services | 2.49 |
Performance Review
Investment performance is a critical factor in any investment decision. The performance of TZA, as of June 30, 2023, is as follows:
| Period | NAV | Market Close |
|---|---|---|
| 1M % | -21.48 | -21.43 |
| 3M % | -14.64 | -14.82 |
| YTD % | -23.60 | -23.64 |
| 1Y % | -42.36 | -42.37 |
| 3Y % | -45.84 | -45.88 |
| 5Y % | -40.73 | -40.72 |
| 10Y % | -40.64 | -40.69 |
| S/I of the fund % | -49.33 | -49.32 |
While past performance does not guarantee future results, the data provides a snapshot of the fund's historical performance. It's not something to hold, and very difficult to trade because of the interaction of leverage to volatility independent of direction. Path.
Risk Factors
Investing in leveraged ETFs like TZA involves substantial risks. Such funds are designed for short-term trading and not for long-term investment. They can be highly volatile due to their use of financial derivatives and debt to create leverage. The compounding effect of daily returns can also lead to significant losses over time, especially in volatile markets.
Furthermore, small-cap stocks, the underlying assets of TZA, tend to be more volatile and less liquid than large-cap stocks. They can be affected by a variety of factors, including economic downturns, credit events, and changes in market sentiment. No doubt, there are a number of "zombie companies" that may not survive refinancing into higher interest rates. That doesn't make the investment or trading case easier for TZA.
Concluding Thoughts
Investing in leveraged inverse ETFs like TZA can offer substantial returns, but they also come with significant risks and are wildly difficult to time. Most individuals and institutions should stay away from these types of funds, and instead consider imperfect hedges like Gold, Treasuries, the Dollar, or Utilities as a risk-off bet. If one did want to position into TZA, due diligence, including a thorough understanding of the fund's structure, holdings, and performance, as well as an assessment of market conditions and individual risk tolerance, is crucial.
Remember, while it may seem logical to position against overvaluation, especially in the case of small-cap stocks, using daily leveraged products like TZA can be risky, even if you're directionally correct. I maintain my view that a credit event is coming. I just don't know exactly when. And that's why TZA is a problem.
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This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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