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Inverse & Leveraged ETFs: What Investors Need to Know

Balchem Corporation could be a stock to avoid from a technical perspective, as the firm is seeing unfavorable trends on the moving average crossover front.

In this episode of ETF Spotlight, I talk with Sylvia Jablonski, Managing Director at Direxion Investments. Direxion is one of the largest issuers of leveraged and inverse ETFs.

Market volatility is back--making investors nervous about the safety of their holdings. At the same time, traders and sophisticated investors love these sharp gyrations as they get more opportunities to make money using inverse and leveraged ETFs.

First off, we discuss how investors should handle market volatility. Should they try to play the swings?

Sylvia says while short-term pullbacks are great opportunities for traders to make money using inverse and leveraged ETFs, these products be used only by investors who understand them properly and actively monitor them. She uses the examples of the Direxion Daily Technology Bull 3X Shares (TECL) and the Direxion Daily Regional Banks Bear 3X ETF (WDRW) that saw big moves recently.

Sylvia then explains how these ETFs work and achieve the exposure using derivatives, typically swaps and futures.

These ETFs are designed to achieve their stated performance goal on a daily basis and their performance can differ significantly from their stated daily performance objectives if held for a longer period Compounding can have both favorable and adverse effects on the returns.

Should inverse ETFs be treated as trading tools or can investors hold them longer to hedge their existing long positions?

Sylvia says while popular inverse ETFs like the Direxion Daily S&P 500 Bear 3X Shares (SPXS) and the Direxion Daily Small Cap Bear 3X Shares (TZA) that provide three times  inverse exposure to the S&P 500 index and Russell 2000 Index respectively should be used only by sophisticated investors, the Direxion Daily S&P 500 Bear 1X Shares (SPDN) can be used by investors who are looking to hedge their long positions. Please listen to the podcast to learn more.

We then talk about the recent market gyrations as trade concerns, peak earnings, rising rates and global growth slowdown continue to rattle investors. Which areas is Sylvia watching closely now? Will we see a Santa Claus rally this year?

Growth and momentum ETFs were clear winners earlier this year but defensive areas of the market have outperformed of late. There has also been some interest in the beaten down emerging market stocks.

How should you position your portfolio for 2019? Sylvia mentions increased interest in some of their defensive bull funds like the Direxion Daily Healthcare Bull 3x Shares (CURE). She also likes the Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares (UBOT).

We also discuss the four ETFs launched recently by Direxion to reflect GICS realignment-- Consumer Discretionary Bear 3X Shares ETF (PASS), Consumer Discretionary Bull 3X Shares ETF (WANT), Consumer Staples Bear 3X Shares ETF (LACK) and Consumer Staples Bull 3X Shares ETF (NEED).

Please make sure to listen to the podcast for additional information. You'll definitely feel more comfortable with the idea of leveraged and inverse investing.

Please visit direxioninvestments.com if you want to learn more about these products. Make sure to be on the lookout for the next edition of the ETF Spotlight! If you have any comments or questions, please email podcast@zacks.com.

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DIR-D SP5 BR 3X (SPXS): ETF Research Reports
DIR-D SP5 BR (SPDN): ETF Research Reports
DIRX-SC BEAR 3X (TZA): ETF Research Reports
DIR-TEC BULL3X (TECL): ETF Research Reports
DIR-D RG BK BR3 (WDRW): ETF Research Reports
DIR-D ROBOTICS (UBOT): ETF Research Reports
DIRX-D HC BL3X (CURE): ETF Research Reports
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