With traditional retail stocks flailing this year, a leveraged play on that group, such as the Direxion Daily Retail Bull 3X Shares (NYSEArca: RETL), may appear to be a risky bet. However, there are some potential catalysts looming for retail stocks, which could make RETL a compelling short-term trade for aggressive traders.
Potential traders should keep in mind that leveraged ETFs are designed to produce triple the performance of the underlying market on a daily basis. Consequently, when investors look at the long-term performance of a typical leveraged ETF, people may notice that the funds do not perfectly reflect their intended strategies.
RETL, which is up nearly 14% over the past week, attempts to deliver triple the daily returns of the S&P Retail Select Industry Index, one of the most widely followed retail benchmarks.
“Q4 is traditionally the strongest quarter across all of retail thanks to the holiday shopping season, but Wall Street generally prices in those gains ahead of time. That being said, take a look at a three-year chart of the Direxion Daily Retail Bull 3X Leveraged ETF (RETL), which seeks to deliver three times the daily return of the S&P Retail Select Industry Index (the “Index”),” according to Direxion.
RETL’s underlying index allocates almost 58% of its weight to specialty retailers and another 17.1% to Internet and e-commerce firms. Multi-line and consumer staples retailers combine for almost a quarter of the index’s weight.
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Since the ETFs rebalance on a daily basis, the compounding effect benefits leveraged ETFs in a upward-trending market. In an upward-trending market, compounding can generate longer-term returns that are greater than the sum of the individual daily returns. Similarly, in a downward-trending market, compounding can generate longer-term returns that are less negative than the sum of the individual daily returns.
“RETL is also well-positioned because of its holdings,” notes Direxion. “With the exception of Sears, most of the fund’s top holdings are in specialty retail (56 percent of the Index, to be exact) which has proven more resilient against Amazon than big-box stores with massive amounts of inventory. Guess and Wayfair in particular are standouts within the Index, each showing consistent growth year-over-year between 2016 and 2017. That performance has pushed Guess up 35 percent year-to-date and Wayfair up over 135 percent as of mid-September.”
While trending markets may offer an opportunity to hold leveraged ETFs for longer periods of time to seek gains, users should still be aware of the risks involved with a highly leveraged position and consider trimming some of their recent gains to rebalance a leveraged position back to their initial weights.
For more information on geared products, visit our leveraged ETFs category.