The ebbs and flows of the market in 2020 were a volatile one for some of the most high beta equities such as small-caps. Traders who once shied away from small-caps due to their volatility may reconsider them for 2021 with the Direxion Daily Small Cap Bull 3X Shares (TNA).

TNA seeks daily investment results, before fees and expenses, of 300% of the daily performance of the Russell 2000® Index. With that triple leverage, you can bet traders backed off small-caps during the height of the pandemic sell-offs in the first quarter of this year.

“The first quarter of 2020 was jittery for the markets due to the novel coronavirus-triggered recession. However, expansionary monetary policies have supported growth and infused liquidity in the financial system,” an InvestorPlace article noted. “This has translated into a big surge for equities. Going into 2021, I am optimistic as the global economy gradually returns to normalcy.”

Since then, however, small-caps have been steadily gaining. Once November arrived, the fund spiked above its 50- and 200-day moving average:

TNA Chart

TNA’s latest market moves have been following its index, which shows overbought territory when using a relative strength index (RSI) indicator. As such, TNA is also showing the same, which means traders may want to wait for a year-end sell-off before entering.

^RUT Chart

The fund has yet to return to its pre-pandemic levels so it may still have some room to run if it follows the Russell 2000:

TNA Chart

Academic Research Supports Small-Cap Strength

On the fundamental side of things, academia supports strength in small-caps. InvestorPlace noted that “small corrections should be used to accumulate industry leaders. At the same time, investors with a higher risk appetite can consider exposure to fundamentally strong small-cap stocks with positive industry tailwinds.”

“For an academic perspective, InvestorPlace asked Surya Chelikani, PhD, associate professor of Finance at Quinnipiac University,” the article added.

“A review of historical market data indicates that small-cap stocks have performed very well post-recession relative to their large cap counterparts,” the article added, noting an email exchange with Dr. Chelikani. “During the past few weeks, the Russell 2000 index (the small-cap stock index) has risen almost 8% while the S&P 500 index rose 3%. Going into 2021, overweighting their portfolio with small caps is feasible investment for those who can tolerate the risk.”

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