When it comes to market movements, small-caps could be a prime example of when market cap size inversely correlates with volatility. That said, however, traders have a couple of options to play the amplified moves in small-caps.
Just like the overall stock market, small-caps haven’t been immune to the latest market downtrends. Inflation, rate hikes, and geopolitical tensions between Russia and Ukraine aren’t muted with small-caps — in certain cases, the moves have the potential to be higher whether markets are up or down.
So far this year, small-caps and large-caps have been experiencing the same market doldrums. The Russell 2000, a prime indicator of the small-cap market, is down 13%, and so is the S&P 500.
Nonetheless, should small-caps get of out their current funk, it’s an opportunity to play bull. That is available with leverage using an ETF like the Direxion Daily Small Cap Bull 3X Shares (TNA), which tracks the Russell 2000 Index and seeks daily investment results equal to 300% of the daily performance of the index.
Play the Bearish Side
On the other side of the fence, when small-caps enter bear territory, this is where inverse funds like the Direxion Daily Small Cap Bear 3X Shares (TZA) could be a wise play. TZA takes the opposite approach of TNA, seeking daily investment results of 300% of the inverse (or opposite) of the daily performance of the Russell 2000® Index.
The fund invests in swap agreements, futures contracts, short positions, or other financial instruments that, in combination, provide inverse or short leveraged exposure to the index equal to at least 80% of the fund’s net assets. The index measures the performance of approximately 2,000 small-capitalization companies in the Russell 3000® Index, based on a combination of their market capitalization and current index membership.
Looking once again at the year-to-date performances, TZA is up close to 50%. Of course with bullish-bearish funds, there also has to be a losing side, and right now, it’s TNA, which is down about 40% — “right now” being the operative word.
For more news, information, and strategy, visit the Leveraged & Inverse Channel.
