Tech Tumble Sparks Volume Surge in Leveraged ETFs

The Technology Select Sector SPDR XLK, the largest technology exchange traded fund by assets, has recovered some over the past several days, but the fund still resides about 7.5 percent below its most recent high, set in July.

Following its July high, XLK retreated with selling pressure accelerating earlier this week, a scenario that sparked soaring volume in the triple-leveraged ETFs designed to be geared plays on XLK. It looks unlikely to happen today, but the Direxion Daily Technology Bear 3X Shares TECS and the Direxion Daily Technology Bull 3X Shares TECL have been homes to volume explosions in recent sessions.

Over the past five trading sessions, excluding today, volume in TECS surged to 140 percent above the ETF's trailing 20-day average, according to Direxion data. Only four of Direxion's triple-leveraged ETFs saw great volume increases over those five days. 

TECL, the triple-leveraged bullish tech ETF, has not exactly been docile, either. Perhaps spurred by the early week decline in U.S. stocks, traders have been rushing to embrace TECL, sending that ETF's five-day volume more than 131 percent above the trailing 20-day average, according to issuer data. Only six Direxion ETFs, including TECS, saw greater turnover increases over that span.

TECL attempts to deliver triple the daily performance of the S&P Technology Select Sector Index while TECS tries to deliver three times the daily inverse performance of that index. The S&P Technology Select Sector Index is XLK's underlying benchmark. So in a perfect world, if XLK rises one percent on a particular today, TECL should gain three percent.

However, as this week has taught traders and investors, markets do not always behave as expected and that has proven particularly true for ETFs. In the case of TECL and TECS, both funds have widely deviated from triple the S&P Technology Select Sector Index's performance over the past month.

TECL's 30-day variance compared to triple the performance of the S&P Technology Select Sector Index over that period is nearly 5.8 percent, according to issuer data. TECS' 30-day variance against the benchmark is over 13.3 percent.

Before jumping into either TECL or TECS, traders should be clear on the bet they are considering. In essence, these leveraged plays on Apple Inc. AAPL and Microsoft Corp. MSFT because those stocks combine for 25.5 percent of XLK's weight. Said another way, it is hard to imagine TECL being a winner on days when Apple falls because the iPhone maker is 16.5 percent of XLK's weight.