SPXL: Unique Concentration Risk

seekingalpha2023-11-10

The Direxion Daily S&P500 Bull 3X Shares is a leveraged ETF that could set investors up for knock-out risk due to its composition and structure.The concentration of the S&P 500's top holdings, ...

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href=https://seekingalpha.com/article/4649770-spxl-unique-concentration-risk><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The Direxion Daily S&P500 Bull 3X Shares is a leveraged ETF that could set investors up for knock-out risk due to its composition and structure.The concentration of the S&P 500's top holdings, ...</p>\n\n<a href=\"https://seekingalpha.com/article/4649770-spxl-unique-concentration-risk\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"SPXU","symbol_name":"三倍做空标普500ETF","start_time":0,"source_url":"https://seekingalpha.com/article/4649770-spxl-unique-concentration-risk","article_id":"2382249159","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/85483377/image_85483377.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2382249159","pubTimestamp":1699548318,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"The Direxion Daily S&P500 Bull 3X Shares is a leveraged ETF that could set investors up for knock-out risk due to its composition and structure.The concentration of the S&P 500's top holdings, particu","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"SPXU":"三倍做空标普500ETF","BK4550":"红杉资本持仓","LU0466842654.USD":"HSBC 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ACC"},"translate_title":"SPXL：独特的集中风险","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"SPY":1,"SPXL":1,"MSFT":0.9,"FDN":0.9,"GOOGL":0.76,"GOOG":0.75,"OEF":0.6,"OEX":0.6,"SDS":0.6,"SH":0.6,"SPXU":0.6,"SSO":0.6,"UPRO":0.6,"ESmain":0.6,"IVV":0.6,".SPX":0.6},"content_text":"The Direxion Daily S&P500 Bull 3X Shares is a leveraged ETF that could set investors up for knock-out risk due to its composition and structure.The concentration of the S&P 500's top holdings, particularly in the tech sector, poses a risk of magnified losses for SPXL in a highly concentrated market.The daily reset mechanism and leveraged nature of SPXL can lead to significant volatility and rapid drawdowns in value, especially if the top holdings face downturns.Scott Olson Investment (Short) Thesis The Direxion Daily S&P500 Bull 3X Shares (NYSEARCA:SPXL) is designed to offer 3x the daily performance of the S&P 500 with leveraged ETF mechanics that make it reset daily. While leveraged ETFs can have a specific place in a person's portfolio when they want to make a very precise, well-timed bet, this ETF has composition and structure that will likely set it up for failure in the longer term. With the S&P 500's top 10 holdings encompassing over 30% of the ETFs holdings (firms like Microsoft and Apple alone making up over 14% of the index), bad performance by just one stock can drag down the S&P 500 and therefore SPXL. The amplified exposure provided by SPXL can result in outsized gains during market rallies but also poses a severe risk of magnified losses, particularly in a highly concentrated market (like this one). As big tech firms fight each other over AI market share & dominance, this can cause increased volatility in both their earnings and stock prices. For an ETF like SPXL and its daily leverage resets, these oscillations can be seriously damaging to an investor's portfolio. This is a sell in my mind. Background on SPXL Launched in November 2008, SPXL is managed by Rafferty Asset Management, LLC, and seeks to deliver three times the daily returns of the S&P 500 through swaps and futures. The fund is not without its warnings; the issuer cautions that a drop of over 33% in the S&P 500 on a single day could wipe out the entire principal of the investment. While this scenario is extreme, it underscores the inherent risk of the fund. As an example, SPXL peaked at $147.98 a share on January 4, 2022. While the S&P 500 is down 8.9% from the January 4, 2022, high, SPXL is down over 44% over this time frame to $82.00/share, even after SPXL is up 33.64% YTD and SPY is up 14.82% in 2023. This is the consequence of a leveraged ETF. As stocks fell last year due to rising interest rates, the effects were devastating to this leveraged ETF. The Unique Problem: Extreme Concentration of the S&P 500 While leveraged ETFs are by definition more volatile and can lose more in a given day, concentrated ETFs can make this worse. Recent data indicates that the S&P 500 (SPY)'s top 10 holdings, led by Microsoft and Apple, reflect a substantial portion of the index's total market capitalization, with other major contributors including Amazon, Nvidia, and Alphabet (all big tech companies that are competing against each other in some way or another). Collectively, the top 10 holdings make up 31.31% of the S&P 500's current weighting. 8 of these top 10 stocks are tech companies meaning their economic performance is somewhat correlated to each other, and their profit patterns will likely erode if they increase competition among one another. By some measures, the S&P 500 is the most concentrated it's been in decades. Another historical example of over-fixation on a small group of stocks is the Nifty-Fifty Bubble of the 1970s. This did not end well. This concentration means that the performance of SPXL is not only tied to the general movement of the S&P 500 but is disproportionately influenced by the performance of these few mega-cap stocks. This creates the risk that as these Big Tech companies compete with each other there will be heightened oscillation in the ETF. This can be a major problem. S&P 500 Concentration (Slickcharts) Why This Creates a Unique Risk to SPXL (Oscillation) Leveraged ETFs inherently perform well in trending markets but suffer in volatile, oscillating market conditions due to their daily reset mechanism. SPXL's triple-leveraged nature, combined with the S&P 500's concentration, can lead to significant volatility. This structure means that declines in a few top holdings can lead to substantial, rapid drawdowns in SPXL's value. If stocks like Microsoft and Alphabet faced downturns, SPXL suffered amplified losses due to its leveraged position. The reason these violent declines are so corrosive have to deal with how to recover gains after losses. When a stock loses 1%, the stock has to go up 1.01% to get back to zero. But when a stock, ETF, or asset loses 50%, the price has to go up 100% to get back to zero. Leveraged ETFs amplify the losses that make it exponentially harder to come back. These precipitous drops can come suddenly and violently meaning losses can come quickly, and what appears to be out of nowhere. In addition, leveraged ETFs tend to generally decay. SPXL managed to fight this trend till 2022. But even just one bad year hurts that and damages the bigger picture. Personally, I like to visualize trends. VettaFi has an excellent chart (see below) that shows what happens in each type of down market performance and how that affects 2x and 3x leveraged ETFs compared to an index. The value erosion even over small windows like 20 trading days can be concerning. Performance of Leveraged ETFs in Market Oscillations (VettaFi) Where Leveraged ETFs Can Be Helpful While SPXL can be a potent tool for experienced traders who can manage its risks and capitalize on short-term market movements, the high concentration of the S&P 500 and the aggressive interest rate hikes by the Fed create a precarious environment for such a leveraged instrument. The fund's long-term performance has indeed outperformed the SPDR S&P 500 ETF Trust since its inception, but this comes with a high-risk profile, including a maximum drawdown of over 62% and a substantial beta of 3.11 relative to the S&P 500 between March 2010 and May 2023. The Big Takeaway  The SPXL ETF presents a high-risk option for those seeking magnified exposure to the S&P 500's movements. However, the current concentration of the index amplifies risks, making SPXL a potentially hazardous investment for the unprepared. While it can offer market-beating returns in the short term, the long-term investment thesis is less clear due to the volatility decay and extreme concentrations of the underlying index. SPXL is a high risk given the high concentration. I believe that it's a sell.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2382249159"}