TZA Vs SRTY Stock: Investors with a positive outlook towards U.S. small-cap equities may invest in inverse exchange-traded funds (ETFs) or inverse leveraged ETFs.
However, investors interested in inverse ETFs should ensure that they do not hold the ETFs for periods longer than one day because the effects of compounding may impact the position causing the returns to substantially deviate from the target return percentage.
Investors bearish on U.S. small-cap equity market should consider The Direxion Daily Small Cap Bear 3X ETF(TZA) or ProShares UltraPro Short Russell2000(SRTY).
The Direxion Daily Small Cap Bear 3X ETF (NYSEARCA: TZA) seeks daily investment results, before fees and expenses, of 300%, or 300% of the inverse (or opposite), of the performance of the Russell 2000® Index, which serves as one of the main benchmarks for tracking U.S. small-cap stocks.
Why Bet Against Small Caps?
If you’re going to bet against small caps the question is which is the better bet: TZA vs SRTY?
First, it’s important to know what you’re getting into….
The U.S. small-cap equity market includes common stocks of small to medium companies in the United States, whose market capitalization range is approximately between $300m to $2 billion.
The Russell 2000 Index and the Standard & Poor’s Small-Cap 600 Index are the two primary benchmarks tracking the U.S. small-cap equity market.
In times of economic uncertainly and volatility, as is the present case, investors often demonstrate wariness towards smaller companies, owing to the additional risks they present because of tighter profit margins and an inability to efficiently manage costs in the absence of buying power.
Also, with interest rates remaining near zero for many years, smaller firms have accumulated a lot of debts which make them more susceptible to economic slowdown.
Therefore, there is hardly anything surprising in the fact that small-cap have broadly underperformed with respect to their larger blue-chip peers. They also are currently at the forefront of pandemic-driven sell-off, as investors fear that a virus resurgence could diminish optimism about a quick economic recovery.
Furthermore, economic uncertainty was again in the limelight after Federal Reserve Chairman Jerome Powell cautioned that the economic recovery would not be swift.
Traders can position for further falls in small-cap stocks with the following two inverse exchange-traded funds (ETFs) that move in the opposite direction to the Russell 2000 Index.
Leveraged ETFs Are More Risky But…
The Russell 2000® 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.
Leveraged and inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage.
TZA seeks a return that is 300% or -300% of the return of the Russell 2000 small-cap index on a daily basis.
The funds should not be expected to provide three times or negative three times the return of the benchmark’s cumulative return for periods greater than a day.
The fund as such is recommended for speculators and day traders only interested in tracking small-cap stocks, and who harbor no plans to hold it for more than a day.
TZA tracks the Russell 2000 small-cap index on a daily basis, and, as such, is generally considered unsuitable for investors with limited knowledge of leverage risk, or investors not possessing the knowledge or the resources to manage their own investments.
The Direxion Daily Small Cap Bear 3X ETF consists of multiple Russell 2000 Index Swaps, which are the top holdings of the fund. These swaps are derivative contracts, wherein parties involved exchange one cash flow with another party’s cash flow on specified dates.
The cash flows which are exchanged are linked with the Russell 2000 Index. TZA is an open-ended fund yield with a distribution yield of 1.95 % and over $700m assets under management.
The Direxion Daily Small Cap Bear 3X ETF Holdings
Over 68% of the ETF’s investment is in Healthcare, Financials, Industrials and Information Technology.
| Index Top Ten Holdings % | |
| Teladoc Health | 0.87 |
| Novocure | 0.40 |
| AMEDISYS | 0.40 |
| Generac | 0.39 |
| Lumentum | 0.38 |
| Repligen | 0.35 |
| Haemonetics | 0.35 |
| Acadia Pharmaceuticals | 0.33 |
| Trex | 0.32 |
| Rexf Inl | 0.32 |
| Index Sector Weightings % | |
| Health Care | 21.38 |
| Financials | 16.73 |
| Industrials | 15.21 |
| Information Technology | 15.11 |
| Consumer Discretionary | 8.74 |
| Real Estate | 7.58 |
| Utilities | 4.47 |
| Materials | 3.41 |
| Consumer Staples | 3.41 |
| Communication Services | 2.25 |
| Energy | 1.72 |
The Direxion Daily Small Cap Bear 3X ETF Expense Ratio
The expense ratio for TZA is 1.07%, which could be considered on the higher side even for the inverse equity segment. However, it is quite reasonable when compared to its peers.
The expense ratio is the fee charged by the investment company every year to manage your fund. Also, known as annual fund operating expenses, it covers costs like legal cost, administration cost, advertising cost and the management cost incurred in mutual fund management.
This fee is different from the sales fee and commission or the expenses incurred on the buying and selling of portfolio. For example, if your investment is $1,000 and the expense ratio is 1%, then $10 is what you have to pay the investment company to manage your funds.
The Direxion Daily Small Cap Bear 3X ETF Risks
TZA is an extremely aggressive 1-day bet against the Russell 2000 small-cap index.
As is the norm with geared inverse ETFs, TZA is designed to provide its -3x exposure for 1 trading day, and, therefore, the fund is recommended for speculators and day traders who aim to track small-cap stocks and only plan to hold TZA for not more than one day.
Because TZA only seeks to provide a return that is -300% of the daily return of the benchmark, investors who plan to hold the Direxion Daily Small Cap Bear 3X ETF for longer than one day need to adjust their position on a daily basis to ensure they are not affected by the compounding characteristic of the ETF.
Investors planning to hold TZA for no longer than 1 day, will need to adjust their investment on a daily basis to ensure that the effects of compounding do not impact the position, and it provides the -300% return it promises.
ProShares UltraPro Short Russell2000
The ProShares UltraPro Short Russell2000 (NYSEARCA: SRTY) seeks daily investment results that correspond to three times the inverse (-3x) of the daily performance of the Russell 2000® Index.
The Fund invests in financial instruments that ProShare Advisors believe should have similar daily performance characteristics as three times the inverse of the daily performance of the Index.
The index is a measure of small-cap U.S. stock market performance. Investors should monitor their holdings daily as owing to the compounding of daily returns, holding periods of greater than one day can result in returns that are significantly different than the target return.
ProShares UltraPro Short Russell2000 Holdings
A broad small-cap index, the Russell 2000 is not singularly concentrated towards any one sector or firm. Financials, industrials, tech, consumer cyclicals, and healthcare are all significant sectors in the index.
Top 8 Holdings
| Name | % Assets |
| Russell 2000 Index Swap Societe Generale | 51.35% |
| Russell 2000 Index Swap Morgan Stanley & Co. International Plc | 48.15% |
| Russell 2000 Index Swap Bank of America Na | 32.08% |
| Russell 2000 Index Swap Ubs Ag | 28.31% |
| Russell 2000 Index Swap Bnp Paribas | 20.57% |
| United States Treasury Bills | 9.15% |
| E-mini Russell 2000 Index Future June 20 | 4.89% |
| Russell 2000 Index Swap Credit Suisse International | 1.09% |
ProShares UltraPro Short Russell2000 Expense Ratio
The expense ratio for SRTY is 0.95%, which is pretty reasonable.
Total assets under management is around $135 million.
ProShares UltraPro Short Russell2000 Risks
As is the norm with the majority of geared inverse products, SRTY is designed to provide its -3x exposure for one trading day.
As such, investors holding it for more than a day run the risk of being exposed to the effects of compounding.
Due to the compounding of daily returns, holding periods of greater than one day will cause the returns to drift away from the expected 3x inverse exposure over periods longer than a day.
Investors, as such, should refrain from holding it for more than a day, and if they do so, they will need to adjust their investment on a daily basis. The fees charged for its exposure is reasonable, but investors obviously are more concerned about trading costs.
Fortunately, SRTY trades well, with small spreads and excellent block liquidity. The fund, though, does have some counterparty risk, as the issuer uses swaps to get its exposure.
The Direxion Daily Small Cap Bull 3X ETF (TZA) looks to deliver triple the daily returns of the Russell 2000 Index, a benchmark which, along with its peers, has been underperforming vis a vis its large-cap competitors owing to the Covid-induced economic downturn. ETFs such as SRTY and TZA, and index like the Russell 2000, don’t move up in straight lines.
However, if history is any indicator, leveraged small-cap ETF and its underlying index are poised for gains in the forthcoming months. Investors’ bullish sentiments can be gauged from the fact that traders have added nearly $398 million to TZA, despite the fact that leveraged ETF is lower by more than 48% since April 1.
And as far as SRTY is concerned, analysts believe the fund price can go up from 12.370 USD to 17.078 USD in one year. It trades well, with small spreads and excellent block liquidity, and the long-term earning potential is projected over +38. % in one year.
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