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How To Trade News Headlines With Leveraged ETFs

Christopher Dier-Scalise

Because of their magnified exposure and use as a short-term vehicle, leveraged ETFs can be a popular trade around the release of relevant market-moving news, such as the release of economic data points.

Using a 2-or-3x leveraged ETF trading strategy can prove an effective means of generating quick income, as long as the positions are closely monitored and you understand the implications of the news being traded.

A critical thing for traders to appreciate is the nature of leveraged ETFs themselves. Because of their structure and the daily redistribution of their underlying assets, leveraged ETFs are built to deliver a specific and consistent multiple on a given index over a short period of time—typically no more than a day. This design is why they can be useful in capitalizing a sudden directionality within the wider market, and why the long term performance of these funds are not correlated to their daily standard of return.

For example, let’s take a look at the outcomes from some recent OPEC meetings as they impacted Direxion Daily Energy Bull 3x Shares (ERX) and Direxion Daily Energy Bear 3x Shares (ERY) ETFs, which track the Energy Select Sector Index, including stocks like Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVX).

The points indicated by the arrows represent OPEC meetings that concerned efforts to raise crude prices through coordinated production cuts between OPEC and non-OPEC countries. The effort has so far had little effect on increasing oil prices, and news prior to the meetings revealed some lagging compliance between member and nonmember nations. Resultant moves following the meetings (directly after the arrow) show the negative price pressure that the unchanging strategy of production cuts had on the ETFs.   Also notice the indexes tendency to return to the middle. This trend generally scales the further you examine the chart. While ERY saw clear positive directionality immediately following the ineffectual meetings, those moves generally reversed two or three days later. This is due to rebalancing and the emergence of other catalysts affecting the index.   This leads to the other key consideration headline traders should make when adopting a leveraged ETF position on a current or upcoming news item: how has the market previously behaved in the same duration on similar news? Let’s look at the recent activity surrounding legislation to change the nation’s healthcare infrastructure as seen through the lens of Direxion Daily Healthcare Bull 3X Shares (NYSEARCA: CURE) and Direxion Daily Healthcare Bear 3X Shares (NYSEARCA: SICK) 3X Shares ETFs.     The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized. For the most recent month-end performance please visit the funds website at direxioninvestments.com.   Over the course of July, the Republican-controlled Senate struggled and ultimately failed to pass legislation to overhaul the country’s healthcare infrastructure. One of the strongest correlations between congressional action and the index occurred late in the month, on July 27, when Senate Republican’s third and latest attempt to overturn much of the current healthcare system failed to pass.    This news item provided a clear and directional catalyst for a downturn, which benefited SICK. However, previous uncertainty over the course of the legislation maintained an atmosphere of volatility within the securities and posed the potential for any single piece of news on health care legislation turn in either direction.   This can be chalked up to a variety of factors, including healthcare’s recent historical volatility and the seeming inability of the government to reach a consensus on a viable system. The uncertainty surrounding the sector should give traders pause before leaping into a leveraged position on a news event without first recognizing the individual physics of the indexes they are trading and the news items influencing them.   The main takeaway traders should consider when approaching a leveraged trade is whether a reliably consistent trend can emerge from a headline based on the underlying index’s previous behavior.  

* The Net Expense Ratio includes management fees, other operating expenses and Acquired Fund Fees and Expenses. If Acquired Fund Fees and Expenses were excluded, the Net Expense Ratio would be 0.95%. The Funds’ Adviser, Rafferty Asset Management, LLC (“Rafferty”) has entered into an Operating Expense Limitation Agreement with each Fund, under which Rafferty has contractually agreed to cap all or a portion of its management fee and/or reimburse each Fund for Other Expenses through September 1, 2018, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s daily net assets other than the following: taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses. If these expenses were included, the expense ratio would be higher.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized. For the most recent month-end performance please visit the funds website at direxioninvestments.com.

An investor should consider the investment objectives, risks, charges, and expenses of Shares carefully before investing. The prospectus and summary prospectus contain this and other information about Shares. To obtain a prospectus or summary prospectus please visit www.direxioninvestments.com/regulatory-documents. The prospectus and summary prospectus should be read carefully before investing.

There is no guarantee that the funds will achieve their objectives. The Leveraged and Inverse ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking Daily leveraged investment results and intend to actively monitor and manage their investments.   Investing in the Funds may be more volatile than investing in broadly diversified funds. The use of leverage by a fund means the Funds are riskier than alternatives which do not use leverage.

Direxion Shares Risks – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Each Fund does not attempt to, and should not be expected to, provide returns which are three times the performance of their underlying index for periods other than a single day. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, risks specific to investment in securities of a Fund’s underlying index, for the Bull Funds, Daily Index Correlation Risk and Other Investment Companies (including ETFs) Risk, and for the Bear Funds, Daily Inverse Index Correlation Risk and risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.

Distributor: Foreside Funds Services, LLC.

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