GGLL: Window Of Opportunity Imminent For A Leveraged GOOGL Play

seekingalpha06-30 19:30

JHVEPhoto The Direxion Daily GOOGL Bull 2X Shares ETF (NASDAQ:GGLL) is a single-stock ETF that could strongly leverage your Alphabet (GOOGL) holding by using swaps to try and achieve a daily 200% ...

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In simple words, if GOOGL gains $1, GGLL is designed to gain $2. Of course, the opposite is also true - any daily losses will double as well. I’ve written extensively on single-stock ETPs or exchange-traded products, and I’ve found that the best way to start my thesis is to talk about the risks of investing in leveraged products. The reason is that I believe every investor should fully assess the risks of any investment, and not just focus on the potential gain. Granted, a 2x gain on top of what you get on your core holding is a handsome return, but are you aware of the risks involved in attempting to deliver such returns on a consistent basis? Thesis: The momentum indicators signal that a window of opportunity might open up for a short-term play with GGLL. There’s plenty of risk, as I’ve outlined below, but the potential alpha certainly looks attractive if you’re willing to handle that level of risk. Why GGLL is Not for Novice Investors The reasons are plenty. Aside from the usual risks of investing in ETFs, you should also be aware of something called volatility decay. This is a type of risk that’s not unique to just leveraged products, but even ordinary traded securities. It’s best explained with an example. One might assume that a given loss on any particular trading day can be offset by an equivalent gain the following day. That’s a logical way to look at it. Unfortunately, that logic is faulty. If you lose $10 on a $100 investment on Day 1, logically, if you gain $10 on Day 2, you’re back to square one. The problem is, when you look at it as a percentage gain or loss, the calculation is entirely different. Losing $10 on Day 1 is basically a 10% loss. So, will a 10% gain get you back to $100? No, it won’t. 10% of $90 - the value of your investment at the end of Day 1 - is only $9, so at the end of Day 2, your investment is worth a whole dollar less. Put another way, your gain on Day 2 should be more than 11.11% for you to break even. This is the simplest way to demonstrate decay. And when you repeat that over and over in a volatile security, your funds can quickly be depleted. Remember, this is for non-leveraged products such as your GOOGL stock. For leveraged products that seek to complement that return by 2x, that volatility decay is also magnified by 2x. Going back to our example, if your underlying asset loses $10, your ETF will lose $20. On a $100 investment, it means losing 20%, and recovering that 20% will require the ETF to gain $20/$80, or 25%, to bring you back to breakeven. That problem is exacerbated by the fact that the ETF seeks a daily gain of 200%, which means the fund will be rebalanced or reset at the end of every trading day. In other words, hypothetically, you’ll never get to Day 2! You’re basically repeating Day 1 over and over again, which means if you lose on the first day, you have to start the next day with a smaller NAV per share. The other way is true as well, and this is essentially the trade-off you’ll be making. That’s just the first of the many risks, but they can be so severe that the SEC and FINRA have both issued warnings about holding such ETFs long-term. The SEC warns about “significant and sudden losses”, because if the underlying asset goes down by 50%, your investment can go to zero, and because of the daily reset, there’s no opportunity to recover. What’s gone is gone forever, swallowed up by the people on the other side of the trade. That Hardly Means GGLL is a No-Fly Zone for All Investors The reason there are so many warnings is that most retail investors are unaware of the elevated risks with leveraged products. They tend to treat them as regular investments and hold them for a period that’s longer than recommended - one day, in the case of highly leveraged ETPs - and are then shocked when their losses seem disproportionate to the losses in the underlying asset. Interestingly, this happened just yesterday during Friday trading. GOOGL lost 1.76% by the end of trading. Below that, look how much GGLL lost.   SA  SA That’s actually in excess of 2x, but that can happen because the leverage is rarely exactly 2x; it could be less or it could be more, as in the case of Friday’s price drop. As to why that drop happened, it’s likely the news of Alphabet being downgraded by Rosenblatt Securities from a Buy to a Neutral. Luckily, GOOGL only dropped less than 2%, and the post-market price already show some signs of recovery, but you can see how the market panicked toward the end of the trading day.   SA I show this as an example of when you shouldn’t be holding GGLL, but that also highlights why this kind of leveraged ETF play can be quite lucrative when it goes your way. How do you try and ensure that you win most of the time? To understand that, we need to literally time the market. It’s not exactly something most analysts would advise as a wise man’s errand, but if you’re a seasoned trader who knows how and when to enter and exit a position, this is definitely something worth exploring. The Bull Case for Investing in GGLL The leverage here is achieved by using swaps, which are essentially contracts that allow the parties on either side of a trade to ‘swap’ the cash flows of different financial instruments. In every sense, it’s a psychological exchange of what one side considers an unnecessary risk for what the other side considers a potential opportunity. In this particular case, the ETF’s fund managers are the ones seeking the opportunity in exchange for a calculated risk, and this is where the leverage essentially comes from. Of course, there are additional costs to this, and the expense ratio of 1.05% comprises 0.95% of the fund’s NAV going towards operating expenses such as management fees, etc., and the remaining 0.10% going towards what’s called “Acquired Fund Fees and Expenses.” However, this percentage is only capped until September 1, 2025. After that, the Operating Expense Limitation Agreement lapses, and it may be renewed for a further period, failing which the additional expenses are added to the fund’s expense ratio, with the burden resting on the fund’s investors. That’s you! Now, let’s look at how the fund has performed in real-life between its inception in September of 2022 and the last trading day this week.   SA An 80% return in a year and a half is very impressive, but we also see that the current rally only began in earnest toward the second half of Q124, and it looks like there’s ample momentum behind it to rally even further over the next several months. That also reflects GOOGL’s own momentum, which you can see has been consistently market-beating on both a price return as well as total return basis.   SA GOOGL’s recent rally began around the same time as GGLL’s, which makes sense because it’s the underlying asset’s momentum that gives the ETF its ability to generate that alpha. Put them together on a graph, and it looks like this:   SA As long as GOOGL’s momentum stays strongly inclined on that upward trajectory, it’s a good time to invest in GGLL to augment those market-beating returns. However, you may want to watch a few momentum indicators on the technical side to validate that momentum. I typically utilize OBV and RSI as two solid signal-generators for leveraged ETFs, but feel free to use your own. It’s simply a question of which pair of glasses helps you see better, and only you can be the judge of that.   SA OBV trended up strongly heading into the weekend, but Friday’s downgrade news from Rosenblatt put a damper on buying momentum. I do see some weakness there, and the RSI did briefly validate an overbought hypothesis, but I think the correction was overdone, and the stock rapidly dipped back down to oversold territory. It almost looks like the downgrade was perfectly timed for bullish investors! That's evident in the RSI chart below.   SA  Looking at these signals, I’d suggest that another rally is imminent. Some investors were understandably spooked by the news of the downgrade, but that’s actually opening up another opportunity for a leveraged play on GOOGL via GGLL. Since the underlying asset is very likely to resume its upward momentum, I’ll rate GGLL a short-term Buy. I’d only recommend holding the ETF for a few days at a time, at the most, unless you’re not worried about the long-term risks that I’ve outlined above. It all depends on your risk appetite and how much you’re willing to ante up for the big prize that may come at the end.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"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":"4.24.2","shortVersion":"4.24.2","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/2447670558"}