About a month ago, in late September, back when the equity markets were toiling near their lows, we pointed out the relative underperformance of U.S. small cap equities compared to large caps in 2011, notably those tied to the Russell 2000 Index .
At the time, we highlighted the fact that iShares Russell 2000 (NYSEArca: IWM) was taking in a substantial amount of assets, to the tune of $1.4 billion over a week’s time. The small-cap ETF posted $2.9 billion of inflows for October. [ETF Flows]
The activity led us to believe that institutional players were making tactical model shifts away from large cap equities and into small cap names in order to potentially capitalize from a narrowing of the performance gap that we have witnessed between large and small caps in 2011.
Year to date, IWM is down 4.19% versus the S&P 500 Index up 0.39%.
This week, with the equity markets exhibiting resiliency the past two sessions, we have seen further evidence of bulls lurking in small caps.
In Direxion Daily Small Cap Bull 3X (NYSEArca: TNA), trading volume has been above average in two of the last three sessions and the fund took in nearly $200 million this week via creations, which equates to approximately 20% of the overall assets in the fund.
TNA is typically used as an aggressive bullish play by institutional portfolio managers and traders who want to leverage exposure to an upside move in the Russell 2000. The trade will work best in a trending bull market, especially if the market (and subsequently the Russell 2000), were to rise in consecutive sessions, and in that case, it is very possible that holders of TNA could realize greater than three times the return of the spot index returns, as the daily leverage would
factor in their favor.
However, as we have pointed out before in these write-ups, any choppiness in the market can be harmful to overall returns when using leveraged funds due to effects of daily compounding and the nature of how these funds are designed.
In any case, there is no denying that an institutional player or players have been gobbling up shares of TNA in recent sessions and it remains to be seen how small caps fare through the remainder of 2011.
Direxion Daily Small Cap Bull 3X
For more information on Street One ETF research and ETF trade execution/liquidity services, contact pweisbruch@streetonefinancial.com.