Faith In Small Caps Is Rewarded, At Least For A Day

One of the big stories from Wednesday's rally was the rebound in small-cap equities and exchange traded funds.

The once thriving asset class entered the day scuffling with the iShares Russell 2000 ETF IWM more than 12 percent below its 52-week high. Yesterday, IWM, the largest small-cap ETF by assets, jumped 2.47 percent on volume that was slightly above the daily average.

What Happened

One day does make a new trend or break an old one, but beleaguered small-cap bulls are undoubtedly pleased to see IWM and other small-cap ETFs rally. IWM entered Wednesday with a fourth-quarter loss of more than 13 percent.

Some active traders that have been sticking by leveraged small-cap ETFs gained some relief on Wednesday as the Direxion Daily Small Cap Bull 3X Shares TNA jumped 7.33 percent on heavy volume.

Why It's Important

TNA, one of the most popular leveraged small-cap ETFs, is designed to deliver triple the daily returns of the Russell 2000 Index. As such, TNA is not the buy-and-hold instrument that IWM is as highlighted by the former's fourth-quarter decline of more than 33 percent entering Wednesday.

Small-cap struggles have not deterred investors from embracing the bullish TNA in recent weeks. For the 30 days ended Tuesday, Nov. 27, TNA's averaged daily inflows of $5.83 million, according to Direxion data. Over that period, just two other Direxion bullish leveraged ETFs averaged larger daily inflows than TNA.

During the same time frame, traders soured on TNA's bearish counterpart – the Direxion Daily Small Cap Bear 3X Shares TZA. TZA, which looks to deliver triple the daily inverse returns of the Russell 2000, averaged daily outflows of $1.35 million over the past month.

What's Next

Clearly, traders are fond of TNA and comfortable betting on more upside for the leveraged small-cap ETF. For that to happen, clearing some technical hurdles would help. For instance, the Russell 2000 is just 5 percent below its 200-day moving average. A move above that line could send more traders flocking to TNA.

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