Play Short-Term Volatility in Small Caps With These ETFs

A September month that could be fraught with volatility could mean heavy market fluctuations for small cap equities. Given this, leveraged exchange traded funds (ETFs) that can play an uptrend or downtrend can be beneficial to a trader looking to extract profits from the market.

Tuesday was already a reminder that small cap equities have a long way to go in order to catch up to their large cap counterparts in terms of year-to-date performance. While the S&P 600 Small Cap index is up about 4% for the year, that pales in comparison to the S&P 500’s 17.5% gain for the year as big tech has been providing much of the gains for the 2023 market rally.

“The week following the Labor Day holiday is historically one of the weakest of the year. It may have something to do with a propensity to implement new investment strategies as summer comes to an end, or perhaps it is just a self-fulfilling tendency,” wrote James “Rev Shark” Deporre in  a Real Money article.

Even if there is some short-term volatility in the small cap arena during the month of September, some analysts noted that there is still some value to extract. As such, getting small cap exposure now could mean bigger moves to the upside in the long run if investors are looking for value-oriented plays.

“Valuations of some of these companies are still lower than their midcap or large-cap peers. The absence of any large sell-off in the markets lasting more than a couple of days means that investors are not in a hurry to take profits and tend to overlook temporary overvaluations,” said Deepak Jasani, Head of Retail Research, HDFC Securities.

Play Both Sides of the Small Cap Trade

In the meantime, short-term volatility can open up profitable opportunities no matter if the market is up or down. Direxion Investments offer leveraged exchange traded funds (ETFs) that also have an inverse pairing so profits can be made for bullish or bearish plays.

If September drags down small caps, traders can use the Direxion Daily Small Cap Bear 3X Shares (TZA). The fund seeks daily investment results of 300% of the inverse (or opposite) of the daily performance of the Russell 2000® Index.

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-capitalization companies in the Russell 3000® Index, based on a combination of their market capitalization and current index membership.

For more news, information, and strategy, visit the Leveraged & Inverse Channel.