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Leveraged ETF Are Fighting The Small-Cap Bear

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The Russell 2000 Index, one of the most widely gauges of domestic small-cap stocks, tumbled 2.55 percent Monday. That means the small-cap benchmark is 20 percent below its 52-week high and that means the index is officially in a bear market.

What Happened

After surging for much of the first three quarters of this year, small caps started selling off late in the third quarter and investors have continued repudiating the asset class in the fourth quarter. The Russell 2000 is sporting a fourth-quarter loss of over 19 percent.

“The names are the most sensitive to fluctuations in the economy and market sentiment because of their small size, and could signal larger caps would soon join them,” according to CNBC.

Why It's Important

These should be halcyon days for the Direxion Daily Small Cap Bear 3X Shares (NYSE: TZA), which attempts to deliver triple the daily inverse returns of the Russell 2000. Indeed, TZA is up nearly 14 percent over the past week.

However, traders are tempting fate by embracing TZA's bullish cousin, the Direxion Daily Small Cap Bull 3X Shares (NYSE: TNA). TNA tries to deliver triple the daily returns of the Russell 2000, a strategy that is not working these days as highlighted by TNA's December decline of more than 24 percent.

The Russell 2000 “reached its the lowest level since August 2017 on Monday, continuing a sell-off triggered by worries on a slowing U.S. economy,” according to CNBC.

What's Next

Just as recent returns for TNA and TZA paint opposite pictures, so do flows to and from the leveraged small-cap ETFs. Last Friday, the bullish TNA was Direxion's top asset gainer, adding more than $18 million in new assets while traders yanked nearly $8 million from the bearish TZA, according to issuer data.

For the 10 days ended Friday, Dec. 14th, TNA is Direxion's top asset-gathering ETF by a substantial margin while the bearish TZA is fourth among the issuer's leveraged funds in terms of assets lost over that period.

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