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Betting Against The Small-Cap Rally

Small-cap stocks and ETFs are getting their mojo back. After lagging their large-cap peers for much of this year, U.S. small-caps started rallying in significant fashion in mid-August, a move that continued through the end of the third quarter.

The Russell 2000 Index, one of the most widely followed gauges of smaller U.S. companies, was iup 4 percent over the last week in September and 7.5 percent over the past month, bringing its year-to-date gain to about 11.5 percent.

As is often the case with short-term moves such as the aforementioned by the Russell 2000, some market participants are worried that this is too much of a good thing in too narrow a time frame. Judging by the recent treatment of some leveraged small-cap ETFs, some traders are wagering on near-term declines for the Russell 2000.

Leveraged Ideas

Among inverse and leveraged small-cap ETFs, two of the biggest names are the Direxion Daily Small Cap Bull 3X Shares (NYSE: TNA) and the Direxion Daily Small Cap Bear 3X Shares (NYSE: TZA).

TNA attempts to deliver triple the daily returns of the Russell 2000 Index, meaning that if the Russell 2000 rises by 1 percent today, TNA should jump 3 percent. TZA, the bearish fund, looks to deliver triple the daily inverse returns of the Russell 2000, meaning that if the Russell 2000 falls by 1 percent today, TZA should rise 3 percent.

Without the application of leverage, small-caps are usually more volatile than large-cap. Historical data confirm as much. That is to say, users of TNA and TZA should treat these products as short-term trades, not long-term, buy and hold investments.

Speaking Of Users...

As was noted earlier, the small-cap rally has some doubters, as the fund flow shows us. Over the past month, traders have been pulling an average of $10.8 million from TNA and over the past five days, the ETF's volume was 31.5 percent above the trailing 20-day average, according to Direxion data.

But wait. There's more. Treatment of leveraged of small-cap ETFs is not simply a matter of traders departing TNA. It also includes some of those traders cozying up to TZA.

Over the same 30-day period, TZA averaged $5.2 million per day of inflows and its five-day volume is 43.4 percent above the trailing 20-day average, according to issuer data.

Related Links:

A Growth ETF For October.

A Soaring Tech ETF.

See more from Benzinga

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