Small-caps can make amplified moves toward the upside, but they can also burn short-term traders on the downside. This is why it pays to be strategic in volatile times like now with leveraged and inverse exchange-traded funds.
The equity market is getting its fair share of volatility these days. Signs of a slowing economy such as a weakening labor market and dissipating inflation have caused more investors to head for the exits on large-caps and pile into the small-cap arena.
“The market was shaken last month by a soft inflation report that boosted Wall Street’s confidence the Federal Reserve would cut interest rates in September,” Investopedia confirmed. It noted that a sell-off in big tech names took place, while simultaneously “investors piled into the small-cap stocks that could benefit most from lower interest rates.”
Indeed, small-cap stocks can prosper as lower interest rates can translate to less debt servicing costs. Small-cap companies can be highly leveraged. So the ability to borrow debt at lower interest rates can be beneficial. Additionally, history typically favors small-caps when it comes to a loose monetary policy.
“Historically, small-cap stocks have tended to outperform in an environment of falling interest rates and easing monetary policy,” Morningstar noted.
Both Sides of the Small-Caps Coin
While small-cap names may sound appealing to investors, they come with a higher degree of volatility. Given the intense market fluctuations they can experience, they make prime short-term trading options. Direxion Investments offers ETF products that can play both sides of the small-cap coin.
When small-caps return to bullishness, traders can use the Direxion Daily Small Cap Bull 3X Shares (TNA). The index both funds follow measures the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, based on a combination of their market capitalization and current index membership.
When indexes turn red and sell-offs take place in the small-cap space, traders can use the Direxion Daily Small Cap Bear 3X Shares (TZA). The fund takes the opposite direction of TNA with the same 300% exposure.
The July volatility is visually apparent as small-caps spiked higher and subsequently dropped during a heavy sell-off. This is where TNA and TZA can provide tactical tools for traders to profit in bullish or bearish situations.
For more news, information, and strategy, visit the Leveraged & Inverse Channel.
