TNA ETF

The prime indicator of small-cap performance, the Russell 2000, is up almost 9% the past five days. As such, small-cap equities are having their own post-election rally and it could sustain itself through the rest of the year and beyond.

The Direxion Daily Small Cap Bull 3X Shares ETF (TNA) seeks to deliver 300% of the daily performance of the Russell 2000 index. Russell 2000 companies issue more floating rate debt relative to S&P 500 components - a key tailwind during Fed easing. Lower valuations and a smaller payout ratio are likely to drive Russel 2000 outperformance over the medium term.

Small-caps historically outperform large caps due to growth potential and margin expansion. The Magnificent 7 have attracted capital flows to large companies, leaving smaller ones forgotten. Small-caps are not cheaper due to structural problems, but rather due to lack of investor interest, making them a potential opportunity.

Small-caps can make amplified moves toward the upside, but they can also burn short-term traders on the downside. This is why it pays to be strategic in volatile times like now with leveraged and inverse exchange-traded funds.

Small-cap stocks are gaining interest as the iShares Russell 2000 ETF breaks out of a basing pattern. Direxion Daily Small Cap Bull 3X Shares ETF can leverage an IWM rally by a factor of three. TNA currently looks risky as the IWM breakout may be waning, with stalling momentum and too much attention from inexperienced traders.

Small caps have been the best-performing group among major indices recently, signaling a potential end to years of underperformance. The Direxion Daily Small Cap Bull 3X Shares ETF offers leveraged exposure to small caps but comes with elevated risk. Small caps are on the verge of breaking out of a multi-year consolidation pattern, presenting significant upside potential if a breakout occurs.

Shorting both TNA and TZA would have produced an annual net return of about 16% over the last year. Risks include mechanical problems, changes in the volatility of the Russell 2000 smallcap index, changing borrowing fees, variable yields, and a strongly trending underlying index. Because the strategy requires one to short both tickers, I currently rate TNA and TZA as Sells.

A September month that could be fraught with volatility could mean heavy market fluctuations for small cap equities. Given this, leveraged exchange traded funds (ETFs) that can play an uptrend or downtrend can be beneficial to a trader looking to extract profits from the market.