2023-08-23 08:31:07 ET
Summary
- The Direxion Daily Technology Bull 3X Shares is a leveraged ETF that focuses on technology companies in the S&P 500 index.
- TECL aims to achieve a 300% daily return, amplifying gains or losses compared to the underlying index.
- While TECL offers potential for amplified gains, it carries inherent risks and may experience significant losses in a bearish market.
Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a profit with huge leverage. - Stanley Druckenmiller
The Direxion Daily Technology Bull 3X Shares ( TECL ) is a leveraged ETF managed by Direxion Funds, a leading provider of leveraged and inverse ETFs. Its primary focus lies on technology companies within the S&P 500 index, offering investors a way to gain exposure to the technology sector without owning individual stocks.
TECL aims to achieve a 300% daily return, both positive and negative, thereby amplifying gains or losses compared to the underlying index. It’s designed for short-term trading strategies and is not recommended for long-term investment due to the compounding effects of daily returns in high volatility sequences. TECL employs a passive investment strategy, aiming to achieve its investment objectives by investing in tech companies that make up the index.
Leverage is a double-edged sword. Yes, the fund has done well this year, but it is nowhere near the prior highs of 2021. As a matter of fact, it suffered an immense drawdown leveraging into the decline.
The Appeal of TECL
TECL can be attractive for investors looking to exploit short-term price movements in the technology sector. By obtaining triple exposure to the underlying index, the fund offers the potential for amplified gains on winning trades.
In addition, TECL provides diversification by investing in a selection of technology companies within the S&P 500 index. This allows investors to mitigate the risk associated with holding individual stocks and offers an efficient way to gain exposure to the technology sector as a whole. The leverage though is the far bigger risk with daily compounding when in a volatile downturn.
Potential Risks with Leveraged ETFs
As with any investment, there are potential risks associated with investing in a leveraged ETF like TECL. The fund's performance is inherently volatile and carries a unique set of risks. Technology is a growth play and tends to carry high concentration names, making the sector vulnerable to more idiosyncratic risks than other more evenly dispersed parts of the market.
If we look at Technology ( XLK ) unlevered relative to the S&P 500 ( SPY ), the ratio is nearly at the level it was last at in the height of the Tech bubble. With manic trading in Nvidia ( NVDA ), I think broadly the sector is due for a significant reversal and period of underperformance.
Conclusion
Investing in TECL presents an opportunity to gain leveraged exposure to the technology sector. However, it's crucial to understand the inherent risks associated with this type of investment. While it can offer substantial returns in a bullish market, the fund's value can also plummet significantly in a bearish market. I think for those looking to take a speculative bet, TECL fits the bill nicely and is one I'd watch closely for a potential entry after a significant dislocation/credit event as I keep sounding the alarm on now. But given conditions now favoring an accident, I think anything Technology, and leverage, is a big, big avoid.
For further details see:
TECL: The Riskiest Bet Of All