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Traders on Small-Cap Rebound, Leveraged Style

This article was originally published on ETFTrends.com.

For a good part of 2018, small-cap stocks and the related exchange traded funds were a popular trade as some market observers opined that the strong dollar and rising interest rates would benefit smaller equities.

That thesis was dealt a blow late in the third quarter, priming small-cap ETFs for significant declines during the October broader market, but some traders are betting on a small-cap resurgence and are doing so with the leveraged Direxion Daily Small Cap Bull 3X ETF (TNA) .

TNA looks to deliver triple the daily returns of the Russell 2000 Index. Many traders believed smaller companies were insulated from the overseas turmoil. Furthermore, a stronger U.S. dollar and concerns over weaker global growth are also driving investors toward smaller company stocks that tend to earn most of their money from a still growing domestic economy.

Small-capitalization stocks have attracted a lot of attention on the escalating trade tensions, fueled by fears over a potential slowdown in global growth. Consequently, many anticipated that small-caps could weather the storm as large multi-nationals with a large global footprint suffered from trade disputes.

Important Data for Small-Cap ETFs

In recent weeks, one of the best-performing small-cap ETFs has been the Direxion Daily Small Cap Bear 3X Shares (TZA) . TZA attempts to deliver triple the daily inverse performance of the Russell 2000 Index.

Still, it is the bullish TNA that is luring traders. Over the past 30 days, TNA is averaging daily inflows of nearly $13 million, good for one of the best totals among Direxion's leveraged bullish ETFs, according to issuer data. Conversely, the bearish TZA averaged daily outflows of $3.94 million over the same period.

Related: Biotech ETFs Hoping This Post-Election Trend Doesn’t Repeat

Further supporting the small-cap outlook, the U.S. economy is still showing signs of growth with U.S. retail sales and consumer spending trends on the rise while the rest of the world is revealing weaker economic data.

There is a belief that when smaller stocks outperform large caps through the first three quarters of the year that money managers will sell small caps leading up to the fourth quarter, opting for “benchmark hugging” with larger stocks.

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