Purchasing TNA: Two Advantages and Three Disadvantages
The Direxion Daily Small Cap Bull 3X Shares ETF (TNA) is a popular leveraged fund designed to deliver **3 times the daily performance of the Russell 2000 index**. Launched in 2008, TNA aims to provide amplified exposure to the small-cap market by using derivatives like futures and swaps.
However, when it comes to long-term performance, TNA's results diverge significantly from its target return due to daily compounding effects and volatility decay. Leveraged ETFs like TNA tend to perform well in short-term bullish markets but often underperform over multi-year periods during sideways or volatile markets.
While exact long-term return figures for TNA relative to the Russell 2000 are not directly provided, leveraged ETFs generally do not maintain their multiple over long horizons. For instance, the Direxion Daily Small Cap Bear 3X Shares ETF (TZA), which targets -3x daily returns, shows significant erosion over 5 to 10 years, reflecting how daily leverage impacts long-term returns negatively in volatile markets.
In comparison, the Russell 2000 index, as tracked by ETFs like the iShares Russell 2000 ETF, has delivered reasonable single-digit or low double-digit annual returns over the last decade, with less volatility and without the compounding inefficiencies faced by leveraged ETFs.
In essence, TNA is more suitable for short-term traders or tactical plays on small-cap rallies, whereas the Russell 2000 index offers a more stable long-term investment in small caps. Investors holding TNA long term should be cautious due to the effects of daily leverage compounding that can erode returns.
If you're considering using a leveraged ETF like TNA, it's essential to note that it uses derivative securities to produce three times the daily return of the Russell 2000 index. Over the past 5 years, TNA has a -3.8% annualized return, and over the past 10 years, it has a 6.3% annualized return, significantly lower than the 18.4% return of a standard Russell 2000 ETF.
The Direxion Daily Small Cap Bull 3X Shares ETF also comes with a higher net expense ratio of 1.03%, which is higher than average, even for actively managed ETFs. Given its high risk and volatility, even over short periods, the owner of this article advises against investing any money in a leveraged ETF like TNA that you can't afford to lose.
In conclusion, the Direxion Daily Small Cap Bull 3X Shares ETF is a short-term trading tool, not a long-term investment. It is designed to provide amplified returns in a short period, but its long-term performance may not meet its target return due to daily compounding and volatility effects. As with any investment, it's crucial to understand the risks involved and conduct thorough research before making a decision.
- When investing in the Direxion Daily Small Cap Bull 3X Shares ETF (TNA), it's important to note that its returns are amplified through the use of derivative securities meant to deliver 3 times the daily performance of the Russell 2000 index.
- Despite the appealing promise of short-term gains, leveraged ETFs like TNA often underperform in long-term scenarios, as shown by TZA's erosion over 5 to 10 years due to daily leverage impacting long-term returns negatively in volatile markets.
- Given TNA's high risk, volatility, and lower long-term performance compared to the Russell 2000 index, it's advisable to exercise caution when holding TNA as a long-term investment due to the potential effects of daily leverage compounding that can erode returns.
