2023-12-05 11:54:12 ET
Summary
- Direxion Daily Financial Bull 3X Shares ETF is a leveraged ETF that provides leverage in an accessible way and at a pretty low expense ratio compared to normal leverage's borrowing costs.
- Daily resetting of these ETFs can lead to value erosion and other unpredictable dynamics, making them best used over short durations. There are other risks, too.
- Markets may be too optimistic about the current conditions, and inflation data could disappoint, leading to potential losses with leveraged ETFs.
- Stubborn inflation figures are the risk to introduce some downside here.
The Direxion Daily Financial Bull 3X Shares ETF ( FAS ) is a leveraged exchange-traded fund or ETF. As always, the Direxion ETFs offer a pretty low expense rate for the sort of leverage they provide. However, there are peculiarities around these daily resetting ETFs that make them useless over longer-term periods, or at least unpredictable. More importantly, we think that the conditions of general markets reflect a consensus position that is too optimistic. There are still issues with macro that could materialize in the markets over the next couple of months, so a leveraged bull exposure, where good news has been extensively priced in, offers little advantage.
FAS Breakdown
0.96% is the expense ratio for FAS . It's not a lot, and in general, these ETFs are a good way to get access to leverage in cases where access to leverage may otherwise be limited.
However, these leveraged ETFs such as Direxion Daily Financial Bull 3X Shares ETF reset on a daily basis, which introduces behavior such as value erosion, volatility drift, and other dynamics. If you don't fully understand these risks, you may want to not proceed with a leveraged ETF. They are best used over short durations because of value erosion. They are highly speculative burst instruments. Be careful.
Links for reference on these risks:
- The Lowdown on Leveraged and Inverse Exchange-Traded Products
- Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors
- Regulatory Notice 09-31 | FINRA.org
The underlying index is a selection of the financial sector, meaning full-service banks and other U.S. financial majors. In line with markets believing in a goldilocks scenario, the index has rallied, likely with relieving concerns around deposit beta, as well as issues connecting to government finances and how that might blow back on the financial system.
Bottom Line
Markets are getting excited at " goldilocks " figures and that inflation has come down "on its own." It's easy for inflation to come down on its own when we have lapped post-Ukraine war's massive supply-side inflation. Moreover, some of that supply-side uncertainty has been digested, and there has been even commodity deflation.
The reality is that now without base effects we are still seeing inflation, whether core or not, at above 3%. That's very far away from the maximum policy rate of 2%, and it's no small task to reduce fundamental inflationary behavior, from all sorts of pricing retaliation between buyers and sellers, vendors and customers, that is at too high a velocity, thus leading to that 3% figure. The Fed has been saying for a while now that some damage needs to be done to the economy before inflation comes down to satisfactory levels. Productivity is not increasing, in fact, a lot is going on that continues to negatively impact productivity which is an inflationary effect, and therefore supply-side deflation is not coming to save us.
What markets are pricing in is cuts. The Fed, while getting mildly less hawkish, and entirely committed to a higher for longer stance, although more of the FOMC committee are no longer thinking about even higher rates. We think the Fed has a good grasp on things, while the markets are getting impatient about having to sit on the sidelines, and are succumbing to old-era TINA conditioning.
The optimism that had the markets rise could subside as inflation data remains stubbornly high. Even if it falls, and markets see that as a win, the Fed won't since inflation needs to come down quickly in order not to anchor. They will not jump the gun, which means that even in a best-case scenario, rates are going to stay higher for several more months, probably a year.
The November to remember has hit levels that are probably not sustainable. Disappointments around inflation being more stubborn than expected could be incoming over the next month's macro releases. FAS just means you might lose with leverage, with a very low likelihood of even "better" news than what we've currently seen.
For further details see:
FAS: No Upside