Direxion: Leveraged & Inverse ETFs
Where Some Investors See Trouble, Others See Opportunity
What’s the single best word to describe the investment outlook for 2017? “Uncertain” might be the most accurate. Depending on whom you ask, either a 10-year bull market is underway or a pullback is just around the corner. Clearly, no one knows exactly what the new year will bring. Here’s the good news: Uncertainty doesn’t have to be an investor’s enemy.
“We’ve been talking with the most sophisticated asset managers on the Street and if one thing seems clear, it’s that the message is at minimum mixed. There is uncertainty,” says Sylvia Jablonski, managing director and head of capital markets and institutional strategy at Direxion Investments. The company specializes in leveraged and inverse exchange-traded funds.
Still, there are some near-certainties for investors to consider. Notably, the probability of interest-rate hikes in 2017 is high. In addition to Treasury bond funds, rate-sensitive sectors such as emerging markets and utilities may get punished going forward. Meanwhile, the rising strength of the U.S. dollar bodes well for regional banks and financial-services companies. The case can also be made that greater volatility lies ahead.
But in the world of inverse and leveraged ETFs, where some investors see trouble, others see opportunity. “Regardless of the equity rally, we’ve seen the start of interest-rate hikes which are believed to continue through 2017,” Jablonski says. “This creates opportunities for investors looking to express bearish views on the 20+ Treasury index.” For example, one idea is to use an inverse ETF such as the 3X Daily Direxion 20+ inverse fund or, for a longer-term outlook with less leverage, an inverse Treasury Bear ETF. (Inverse ETFs aim to hit the opposite of the daily percentage movement of an index.)
Another investment opportunity to consider relates to the strength of the U.S. dollar, which has reached all-time highs. “We see potential opportunities to express a downside view or hedge portfolios in emerging-market stocks and ETFs,” Jablonski says, “as these regions will be impacted by the implications of a strong dollar.” For example, Direxion offers a 3X Daily emerging-markets bear fund.
Meanwhile, some of the notable indices showing recent gains since the election have been the S&P 500, financials, regional banks, energy, biotech and small-caps. This could be due to investors expressing a view that potential deregulation and corporate tax relief will lead to earning potential and further upside performance.
Whether an investor is bullish or bearish, if there’s some uncertainty about the outcome of a particular trade, it can be a good time to consider hedging that position. For example, investors who are eager to continue capitalizing on the recent rally but who fear volatility ahead, might investigate whether hedging some of their portfolio with an inverse ETF makes sense. These funds pose their own risks, yet they also offer a cost-efficient alternative to selling and going to cash, especially for those investors who are both convinced in the rally’s strength—and uncertain about the future.
Investors who have large, broad-based S&P 500 positions might have the twin—and competing—goals of wanting to stay locked into any upcoming rally, while at the same time avoiding the prospect of dangerous volatility ahead. “You’d like to hedge because you’re not sure about volatility and the direction in the markets—that’s where inverse funds come in,” Jablonski says.
“That tends to be the conversation with the less frequent traders, the buy-and-hold guys,” she says. “We talk to them about using inverse funds to hedge their overall portfolios. This way they participate in the upside, but they have some protection if volatility comes back.”
For investors who are savvy about the risks, leveraged and inverse ETFs offer up the potential for big returns based on short-term ideas. For example, investors who believe the rally will continue into the new year, there might be ways to capture short-term gains before long-term certainty sets in. Inverse and leveraged ETFs offer tools for advisers to express their short-term views. Still, Jablonski warns, “Make sure you have both directional conviction and understanding how the funds work.”
Another consideration with leveraged ETFs is how long to hold them. While these products are meant for short-term trades, a little patience can pay off. Take the S&P 500. Investors who think the underlying index is trending upwards can use a 3X strategy to magnify their exposure to that index. “These products are meant to be traded and not held,” Jablonski says, “but if you are comfortable with the product for a period longer than the day you may be able to benefit from the compounding, but it’s always wise to monitor them actively while holding them.”
Direxion offers a broad array of nontraditional ETFs and mutual funds, including tactical short-term trading tools and strategic long-term investing strategies, to accommodate various market cycles.
DIREXION RESEARCH & SPECIAL REPORTS
Where Some Investors See Trouble, Others See Opportunity
As the U.S. continues along the extended bull run, the markets are at greater risk of an uncertain turn upending investment portfolios. Consequently, more traders may look to inverse exchange traded funds to hedge the risks or even leveraged options to capitalize on short-term opportunities.
ETF Trends publisher Tom Lydon spoke with Sylvia Jablonski, managing director and head of capital markets and institutional strategy at Direxion Investments, at the Inside ETFs conference that ran Jan. 22-25, 2017 to talk about leveraged and inverse ETFs in a time of greater uncertainty.
“Since the election, we have a new president took office, and with a new president comes a a lot of uncertainty,” Jablonski said. “We’ve heard advisors talking a lot about two things: What are the opportunities and what are the risks.”
U.S. equities have popped since the presidential elections, but have recently meandered as traders grew more uncertain over President Donald Trump’s ability to execute campaign promises and the administration’s protectionist stance.
Looking at opportunities, Jablonski pointed to tax reform that could help companies more efficiently expand, along with deregulation cutting the red tape that has impeded many areas, like what Dodd-Frank has done to shackle the financials segment.
“On the 3x side, we have a lot of opportunities,” Jablonski said. “A 3x trader might be looking for something like leverage exposure S&P 500 or regional banks or financials.”
Opportunistic traders can look to something like the Direxion Daily Financial Bull 3X Shares (NYSEArca: FAS) and Direxion Daily Regional Banks 3x Bull Shares (NYSEArca: DPST) to capitalize on short-term views on further strength in the financial sector, or utilize the Direxion Daily Financial Bear 3X Shares (NYSEArca: FAZ) and Direxion Daily Regional Banks 3x Bear Shares (NYSEArca: WDRW) to express short-term hedge of the opposite if your view is mean reversion.
The Direxion Daily S&P 500 Bull 3X Shares (NYSEArca: SPXL) could help traders capture a rally in large-caps as we continue to see deregulation, favorable tax policies and potential mergers ahead to support market moves.
On the other hand, Jablonski warned of ongoing uncertainty and potential volatility that remains a risk to investors.
“On the inverse side, we have these negative one beta tools,” Jablonski added. “They’re tax efficient, they’re inexpensive – they’re 45 basis points, and they essentially allow an advisor advisors to have a long-term hedge in his or her portfolio.”
For instance, Direxion recently launched the Direxion Daily Consumer Staples Bear 1X Shares (NYSEArca: SPLZ) and Direxion Daily Utilities Bear 1X Shares (NYSEArca: UTLZ) to hedge against weakness in the consumer staples and utilities sectors.
Fixed-income investors may also hedge against the Federal Reserve interest rate hike through inverse or short Treasury bond ETFs, such as the Direxion Daily 7-10 Year Treasury Bear 1x Shares (NYSEArca: TYNS) or Direxion Daily 20+ Year Treasury Bear 1x Shares (NYSEArca: TYBS).
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