Russia Traders Hunting for Rebound Pile Into Leveraged Bull ETF

Updated on
  • Shares outstanding in Direxion's Bull 3x Shares fund climb 84%
  • Investors pull money from the leveraged bear ETF as it doubles

The economic, financial and political clouds hanging over Russia should put traders off. Not so. Some are betting they can get the timing right when the market bounces back.

Shares outstanding in a leveraged exchange-traded fund, a product that offers triple the return of Russian stocks using derivatives, have increased 84 percent to a record since a 2015 low in April even as the ETF tumbled. In the same time frame, its bearish counterpart, which rises in value when shares fall, saw its outstanding shares cut in half as investors took flight in the four-month period, missing out on a doubling in the price of the fund.

Speculators are lured by one-day gains in the leveraged bull ETF that can exceed 30 percent when the underlying market moves on sudden changes in policy or other major news events, according to Irene Bauer of Twenty20 Investments. The long fund has 12.7 million shares outstanding against the short ETF’s 1.2 million.

“These are the brave ones betting that the decline in Russia will soon be over,” Bauer, chief investment officer at the London-based firm which specializes in ETF portfolio solutions, said by phone. “If you know all the ins and outs of the market, if you time it right, there is a chance to get a lot of money.”

Traders are jumping into the Direxion Daily Russia Bull 3x Shares ETF and getting out of the firm’s leveraged short fund at a time when the economy is reeling from a slump in oil and emerging markets worldwide are crumbling. Investors have added$37 million in July and August to Direxion’s bull fund, which has $162 million in assets, after putting in more than $68 million in June. The $63 million bear fund is on track for a fourth month of consecutive outflows and its assets are almost flat since the beginning of the year.

The dollar-denominated RTS Index of Russian stocks has lost 30 percent since a May high and the ruble fell to a record closing low Friday, capping the longest stretch of weekly losses since the nation allowed the exchange rate to trade freely in November.

Gains from the leveraged ETFs may be amplified but they are also more fleeting. 

The bull fund slumped 24 percent to $12.83 last week, widening its decline from this year’s high in May to 66 percent. It soared 32 percent in one day in December after the central bank raised rates to stem a decline in the ruble. The Direxion Daily Russia Bear 3x Shares ETF, which advanced 28 percent in the five trading days through Aug. 21 to $53.28, is still down 53 percent this year. The Market Vectors Russia ETF, the fund which the two products track, is up 2.5 percent this year.

“If you make the wrong call then it takes a whole lot more to dig yourself out of the hole,” Ilya Kravets, the New York-based director of investment research at Daniloff Capital, said by e-mail.

Leveraged ETFs use swaps or derivatives to try to amplify daily index returns, in contrast with conventional funds designed to match the performance. They have come under scrutiny over several issues since 2009, when the U.S. Securities and Exchange Commission warned that they were typically “unsuitable” as long-term investments in volatile markets.

Risky Trading

Making bullish bets on Russian stocks using leverage is risky in the current market, Kravets said. A selloff in emerging markets accelerated last week as Kazakhstan relinquished control of its exchange rate, triggering declines in assets from South Africa to Turkey. Currencies like the ruble whose values are linked to the price of crude have proven the most vulnerable.

Stocks on the benchmark Russian stock gauge are valued at 5.5 times projected earnings, the cheapest in emerging markets. Brent crude, which is used to price Russia’s main export blend, dropped 7.3 percent to $45.46 a barrel last week, a seven-year low.

“One day there’s bearish sentiment, the next day people are getting more positive on Russia, it’s very cyclical, so our clients who really know the market can get a lot of money if they know how to make the right bet,” Paul Brigandi, managing director and head of trading at Direxion Investments, said by phone from New York. “The negative headlines regarding Russia died down a little bit, and people are becoming slightly more optimistic.”