If you're bullish on small-cap stocks, it might seem like a good idea to buy shares of a leveraged ETF like the Direxion Daily Small Cap Bull 3X Shares ETF (TNA 0.18%) in order to magnify your returns.
Of course, this could certainly work out well if the index goes on an incredible bull run, but it's also important to know what happens if it doesn't. We'll look at some of the reasons why you might want to buy shares of this triple-leveraged index fund, and why it might be a better idea to approach it with caution.
Image source: Getty Images.
What is the Direxion Daily Small Cap Bull 3X Shares ETF?
The Direxion Daily Small Cap Bull 3X Shares ETF uses derivative securities in order to produce three times the daily return of the Russell 2000 index. If you aren't familiar with it, the Russell 2000 is perhaps the most widely used small-cap stock index. The Russell 3000 is a total market index, and the Russell 2000 includes the 2,000 smallest companies in it.
In other words, if the Russell 2000 rises by 2% tomorrow, the Direxion Daily Small Cap Bull 3X Shares ETF should rise by about 6%.
To be perfectly clear, this is designed as a short-term investment vehicle. There is nothing preventing you from owning the ETF for a long period of time, but as we'll see in a bit, the mathematics aren't favorable, unless the Russell 2000 goes on an incredible bull run.
Two reasons to consider the Direxion Daily Small Cap Bull 3X Shares ETF
The most obvious reason to consider the Direxion Daily Small Cap Bull 3X Shares ETF is for its performance potential. While the long-term mathematics typically don't work out to an exact 3X multiple, if the Russell 2000 rises by, say, 20% next year, there's a good chance that this ETF will produce very strong returns.
Second, using a leveraged ETF is far easier than setting up a leveraged investment on your own with things like futures contracts and index options. There's a significant cost (more on that in the next section), but the fund managers are doing the heavy lifting for sure.
Three big reasons to be cautious
Because of the triple-leveraged nature of the Direxion Daily Small Cap Bull 3X Shares ETF, it is naturally going to be more volatile than a standard Russell 2000 ETF. This is true whether the investment is going well or not.
In addition, specialized ETFs typically have above-average fees, and this is no exception. In fact, the Direxion Daily Small Cap Bull 3X Shares ETF has a 1.03% net expense ratio, which is certainly on the high end, even for actively managed ETFs.
Last, and perhaps most important, is the fact that this ETF is set up to produce three times the daily returns of the Russell 2000, not its long-term returns. To be perfectly clear, this ETF will not produce exactly three times the returns of the Russell 2000 over the long term. This is illustrated in the fund's performance over long periods:
|
Period |
Russell 2000 (Annualized) |
TNA ETF (Annualized) |
|---|---|---|
|
One year |
-4% |
-31% |
|
Three years |
0.5% |
-21.8% |
|
Five years |
13.3% |
12.8% |
|
10 years |
6.3% |
-3.8% |
Data source: Direxion as of March 31, 2025. Table by author.
This table shows why the mathematics of daily compounding and leveraged ETFs generally don't mix well, unless the underlying index is performing phenomenally well. Even in periods where the Russell 2000 does reasonably well, like its 6.3% annualized return over the past 10 years, it's entirely possible for a leveraged ETF to decline.
Think of it this way: If you had invested $10,000 in a standard Russell 2000 ETF 10 years ago, you'd have about $18,400 today. The same amount invested in the Direxion Daily Small Cap Bull 3X Shares ETF would be worth about $6,790. Before you buy and hold this, be aware that it's highly unlikely to deliver strong results over the long term.
Investing vs. speculating
Let's be perfectly clear: If you buy shares of a Russell 2000 ETF like the Vanguard Russell 2000 ETF (VTWO 0.09%), you're investing. If you buy shares of the Direxion Daily Small Cap Bull 3X Shares ETF, you are speculating. This is a highly risky ETF, and even if it works out well, it is likely to be extremely volatile over short periods. Plus, the mathematics of daily compounding and leverage simply aren't in favor of long-term outperformance.
I'm not saying that nobody should buy it. In full disclosure, I have a (very) small position in this ETF in my own portfolio, and I own it because I think small caps are undervalued right now, and I hope to take advantage of a temporary mispricing. But my investment in a standard Russell 2000 ETF is about 20 times the size, and it's important not to invest any money in a leveraged ETF like this that you can't afford to lose.
