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Small Caps Are Getting Exciting, But These ETFs Are Exhilarating

Small-cap stocks are on scintillating paces as of late with the benchmark Russell 2000 Index higher by 11.25% over the past month. Last week, the index hit a record high for the first time since 2018.

· 11/18/2020 16:13

Small-cap stocks are on scintillating paces as of late with the benchmark Russell 2000 Index higher by 11.25% over the past month. Last week, the index hit a record high for the first time since 2018.

What Happened

Some of that run is attributable to post-Election Day bliss as small caps historically perform well immediately following presidential elections. Then there's the notion that cyclical names could come back into style as Joe Biden moves into the White House.

Whatever the cause, the effects are tangible and positive for the Direxion Daily Small Cap Bull 3X Shares (NYSE:TNA). TNA, the king of leveraged small-cap exchange traded funds, attempts to deliver triple the daily returns of the aforementioned Russell 2000 Index.

TNA, like any other geared ETF, isn't designed to be held more than a few days. The longer these products are held, the more they can deviate from their stated objectives, but that said, TNA is doing an admirable job of hugging its benchmark, gaining almost 35% over the past month.

Why It's Important

There's no denying the recent momentum for small caps, which is obviously fueling TNA's ascent. On Tuesday, 15 small-cap ETFs, several of which are linked to the Russell 2000, hit all-time highs.

Another possible tailwind for TNA is that, due the excellence of mega-cap tech stocks throughout much of this year, smaller stocks fell out of favor, meaning the asset class is unloved and under-allocated to. Bolstering the near-term case for TNA is that some asset allocators are rectifying the lack of small-cap exposure situation as last week two non-leveraged ETFs tracking the Russell 2000 or derivative indexes were among the top 10 funds in terms of new assets added.

With small caps in their favorable seasonal period and as the group rallies, money managers looking to boost performance into year end may be compelled to increase exposure to smaller equities, a scenario that would lift TNA along the way.

What's Next

There are some other catalysts looming for TNA. First, it can be said the U.S. economy is still in the process of emerging from the coronavirus recession. On a historical basis, small caps are fine ideas coming out of recessions.

Second, small-cap earnings estimates are improving. Analysts believe the group will post earnings growth of 30% next year, putting it 10% of pre-pandemic levels. That's more fuel for the TNA fire.