Following market uncertainty in August, investors may feel compelled to reassess their portfolio allocations. With potential rate cuts from the Federal Reserve on the horizon, now may be a good time to diversify your portfolio and seek growth strategies. Ed Egilinsky, managing director, head of sales and distribution, and head of alternative investments at Direxion, recently sat down with the VettaFi team to discuss small-caps, large-caps, and other interesting avenues for growth.
State of Small-Caps
Nick Wodeshick, Vettafi: I think it’s an understatement to say it’s been an interesting summer for small-caps. What’s your take on where things stand for small-caps right now?
Ed Egilinsky, Direxion: We have mostly short-term trading vehicles — leveraged and inverse vehicles — so we’re geared really towards active traders that are looking at things from a day-to-day perspective. In terms of what we’re seeing with small-caps in general, we have two trading vehicles — a triple leverage bull and bear, TNA and TZA — on the Russell 2000. So, we continue to see interest, depending on the month.
In terms of where the trading volume is, it could vary month to month. And that depends on the performance of the underlying Russell 2000 there. This month, the Russell is struggling a little bit.
We tend to see contrarian types of trades. When the Russell 2000 tends to pull back a bit, we tend to see a little more activity in our bull product, TNA. And when the market rallies a bit, we tend to see a little bit more activity in the bear fund, TZA.
Nick Wodeshick: So, you see the leveraged and inverse funds as an opportunistic way to take on small-caps without having to focus on long-term movements.
Ed Egilinsky: For somebody that’s going to monitor their trading on a day-to-day basis, these are vehicles to express a short-term view. Certainly, small-caps have had opportunities if you timed it right, both to the upside and downside this year, including what’s transpired over the last two months.
It’s been basically a tale of two months. We had a strong upside in July. You’ve probably given back about half of that in August.
But I think you have to look at these on a daily basis and see where the trend is, and if the trend’s going in your direction. I’m sure with interest rates possibly being cut, that could maybe help small-caps from a longer-term perspective. But from our perspective, it’s a day-to-day type of trade when you’re looking at the triple leveraged products.
Magnificent Seven Exposure
Nick Wodeshick: I’ve seen a lot of talk from investors and fund managers on whether they should start readjusting their exposure to the Magnificent Seven a bit. What do you think about that?
Ed Egilinsky: We do have leveraged and inverse single-stock ETFs. So if somebody wanted to take an individual position and felt that some of the Mag Seven were overvalued on an individual basis, we have nonleveraged inverse 1x products based on the daily return of, let’s say, Nvidia, or Microsoft, or Apple. So we have a product that if it’s down 1%, that inverse 1x vehicle would be up 1%, and we’re seeing some activity there.
But, a lot of our inflows continue to be year to date, on the bull side. And the ones that really have led the way have been Nvidia with NVDU and Tesla with TSLL. But also Apple with AAPU, and Amazon with AMZU as well. And with Nvidia’s earnings, we’re going to see some activity on people trading both sides — on the 2x bull or inverse bear, pre- and post-earnings. People anticipate, one way or the other, how Nvidia earnings are going to go. And then post-earnings, people will react to that.
So, we tend to see a lot of heavy trading during earnings around those individual stocks. They’re also very popular. They’re approaching $3 billion in terms of the franchise, and that’s seven pairs of 2x bull and 1x bear on those individual Mag Seven companies. We just added Meta more recently. We’re the only firm I know of that has the complete set of the Mag Seven in our suite of single-stock ETFs — 2x bull and inverse 1x bear.
We also recently launched funds for those that want an equal weight of the Mag Seven and can’t make up their mind on the individual stocks. We have a collective Mag Seven with an equal weight that’s rebalanced quarterly that you can participate in, as well — a 2x bull on the aggregate equal weight, QQQU, and then an inverse one, QQQD.
We’re agnostic – people want to trade these stocks because they’re always in the headlines. They’re also involved in AI in some capacity. And that’s been very popular right now in terms of investing in companies that might have some tie to that. And all seven, in one way or the other, continue to be very popular. We see a lot of interest. And they’re some of our biggest inflows year to date, particularly the bull side, with the 2x bull of those individual Mag Seven companies.
In regards to your question, if you want to move away from the Mag Seven, for example, we do have something that’s more from an asset allocation standpoint, that is not leveraged, and is an equal weight, the NASDAQ 100 QQQE. That consists of the 100 stocks that make up the Nasdaq-100. But unlike the market-cap-weighted options, each of the stocks has a 1% weighting each, so spreads out the individual stock exposure. It doesn’t have the concentration risk.
So, this gives you a little more diversity and performance attribution coming from outside the Mag Seven. We’re seeing a lot of interest there with investors that are concerned about the concentration risk of the S&P 500, as well as the Nasdaq-100 and the overlap there.
Openings for Growth
Nick Wodeshick: Aside from small-caps and large-cap strategies, are there any other avenues of growth that you think investors should consider exploring more right now?
Ed Egilinsky: We have a lot of sectors where people could trade both bull and bear. Our biggest fund, in terms of size, is SOXL, which is the triple leverage on the ICE Semiconductor Index. There’s a lot of interest there. But there’s also interest on the bear side as well, with SOXS. We’ve seen a lot of continued interest in the tech sector — especially with TECL, TECS, which are triple leveraged bull, and bear.
We’re seeing significant inflows, YTD on the 20-plus-year Treasury triple leverage bull, TMF. So, some of our biggest funds, SOXL and TMF, over the last couple of months, have seen some good inflows in there.
Additionally, gold is at a record high. We don’t have direct exposure to gold. But we do have trading vehicles with gold miners, 2x bull, NUGT, and bear, DUST, basically utilizing GDX. Then we have a 2x bull and bear on GDXJ, JNUG and JDST, which is the junior gold miner. We continue to see interest on both sides of that trade. As gold continues to rally, it’s lifted the mining stocks as well. In fact, I believe the mining stocks have just surpassed gold, in terms of performance YTD. We look at it much shorter term than that. But there’s been a tremendous rally in gold mining stocks. They’ve not only played catch-up to the physical gold, they’ve surpassed it in some cases, in terms of the aggregate performance.
Of course, with what’s happening in the Middle East and the geopolitical risk, crude oil stocks continue to be something that people want to trade as well. As the election grows closer, I think people will be looking to express views on who might be elected, and how that might affect different sectors depending on who becomes president. For us, we have a broad lineup. So we’re in a position where we can provide tools for people to trade short term. And in a lot of cases, have pairs, so people could trade both sides.
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