In comedy, there’s something known as the “rule of three,” which basically states that things are much funnier when they come in threes.
This rule explains why it’s always a priest, a rabbi and a minister who walk into the bar. It explains why there never was a Fourth Stooge. It also shows why this paragraph will be so unsatisfying without a third example.
Some jokers in the market have been paying attention to their own rule of three. Consider the top three inflows to exchange-traded funds yesterday. The Utilities Select Sector SPDR Fund took in the most, attracting 4.9 percent of its market capitalization. The iShares MSCI India ETF was second, at 4.7 percent of market cap. Now the punch line: The third largest inflows, 3.7 percent of market cap, went into the Direxion Daily Small Cap Bull 3X Shares ETF, known by its ticker TNA.
As the name implies, 3X funds aim to use leverage to achieve approximately 300 percent of the daily returns of the indexes they track. That allure helps explain why they are often found on the leaderboards of flows into and out of ETFs.
In the case of the TNA, the leverage means it’s lost 26 percent since March 4 as the Russell 2000 Index slid 9.3 percent during the same time.
At first blush, the $37.9 million added to the fund yesterday suggests investors were “buying the dip” as the Russell 2000 was stumbling its way to a 3.3 percent three-day loss. However, it also shows that the buy-the-dip urge may be fading.
Compare yesterday’s flows to the last time the Russell 2000 had a freakout of that magnitude, when it lost 3.9 percent in the three days ended April 14. Investors piled $113.6 million into the TNA that day, and fans of the rule of three will note that’s almost exactly three times yesterday’s flow. The biggest inflows of the year at $114.84 million came on March 27, when the first major cracks in the small-cap rally became obvious as the Russell 2000 extended a five-day, 4 percent slide.
At the same time, the triple-leveraged bears are not exactly licking their chops at the latest dip. They yanked $38.7 million out of the Direxion Daily Small Cap Bear 3X Shares ETF yesterday -- ironically the third-biggest outflow -- as the Russell 2000 slid to the lowest since Feb. 5.
To be sure, daily flows are not always a perfectly timed indicator of sentiment due to delays in the settlement of the creation and redemption process.
Over a longer horizon, the triple bears have pulled $105.6 million from the fund since the Russell 2000 closed at a record on March 4 and shares outstanding in the ETF have declined by 13 percent. The buy-the-dip flows into the triple bull fund are slowing after investors poured $398.9 million into the TNA since the peak and shares outstanding jumped 57 percent.
If you’re wondering, here’s what the bartender usually says to the priest, the rabbi and the minister: “What is this, some kind of joke?”