Chart of the Day: Short ETFs for Small-Caps

May 2nd at 9:59am by Paul Weisbruch, Street One Financial

A leveraged inverse ETF has seen notable inflows in recent sessions as the Russell 2000 has stalled somewhat after an impressive rally late last week.

Direxion Daily Small Cap Bear 3X (NYSEArca: TZA) has taken in nearly $150 million in new assets via creation activity in recent trading days, which equates to more than 20% of the assets outstanding in the fund.

Additionally, we saw call buyers in TZA yesterday which is likely a driver behind asset inflows as well. TZA is designed to deliver three times the daily inverse return of the Russell 2000 Index. [Brokers Fined Over Leveraged and Inverse ETF Sales]

The iShares Russell 2000 (NYSEArca: IWM) is the benchmark ETF that investors are very familiar with in terms of getting “long” exposure to the Russell 2000, and we have seen a trend of put accumulation in recent weeks in IWM options.

It is possible that institutional managers are using TZA for outright bearish speculation, looking for a pullback in the index, or potentially aggressively hedging long positions in portfolios with a long TZA position.

We also note that small caps, represented by the Russell 2000, have lagged large caps year to date, with the Russell 2000 up 10.67% versus the S&P 500 up 12.14%.

In the trailing one year period, the under-performance is even more glaring, with the Russell 2000 down 5.58% versus the S&P 500 up 3.08%, so it is possible that bears are opportunistically establishing, or adding to positions into the recent broad market rally that began to materialize after Apple’s (NasdaqGS: AAPL) earnings last week. [Small-Cap ETFs Underperforming in 2012]

TZA has accumulated more than $600 million since its inception back in 2008, and the fund trades on average more than 24 million shares per session.

This said, due to the underlying makeup of the fund as a daily leveraged/inverse product, the holding periods tend to be small in the fund, and assets can come and go from the fund in a rapid fashion as short term speculators may aggressively flood in or pour out of the fund in size, depending on trading strategies and technical trends (breakdowns or breakouts) that are present at the time.

Direxion Daily Small Cap Bear 3X

For more information on Street One ETF research and ETF trade execution/liquidity services, contact pweisbruch@streetonefinancial.com.

Tickers

TZA