ETF Trends
ETF Trends

Options trading in small-cap ETFs suggests some money managers are buying insurance against market pullbacks as U.S. stocks hit their highest levels since the summer sell-off.

On Friday, we observed a continuation of ProShares UltraShort S&P 500 (NYSEArca: SDS) call buying, which has been a familiar “short” trade going into the recent run-up in equities.

Late last week we  also saw call buyers in a related exchange traded fund, Direxion Daily Small Cap Bear 3X (NYSEArca: TZA).

Coupled with this call buying, we point out that TZA took in an impressive amount of assets last week via creation activity, to the tune of about 13% of its outstanding assets in the fund (> $100 million) as it seems that managers are using these bearish leveraged funds to get short exposure to equities at this juncture.

TZA tracks the Russell 2000 index on a 3 times daily leveraged, “inverse” manner, meaning that traders looking to aggressively speculate on the “bear” side of this index may use the fund to deliver such returns.

Institutional managers may also use funds such as TZA to hedge core long exposure that they may have in U.S. equities, and since these daily leveraged funds have implications caused by daily compounding effects and the leverage is reset daily, adept management and rebalancing of the hedges is crucial in order to achieve desired results.

Since its inception in November of 2008, TZA has amassed nearly $1 billion in assets, and trades a very heavy amount of volume on a daily basis (approximately 27 million shares currently), so it is clear that the fund has gained appeal from both the retail trading community and aggressive speculators as well as larger institutional managers who may be hedging overall portfolio exposures and/or using the fund for short term “bearish” trading.

TZA was up more than 2% on Monday.

Direxion Daily Small Cap Bear 3X

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