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Direxion Daily S&P Biotech Bear 3x Shares (NYSEARCA:LABD) is an inverse exchange traded fund (ETF) launched by Direxion Investments on May 28, 2015, and is managed by Rafferty Asset Management, LLC. An inverse fund is created by using various derivative products with an objective of making profit out of a decline in the value of the respective underlying stocks. We know how the short position works, where an investor sells certain stocks after borrowing it from an investment firm and hopes to buy it at a lower price on a later date. The investor thus plans to make a profit without owning the stock. An inverse ETF is similar to holding a series of short positions on the companies that constitute an ETF. LABD invests in derivatives (such as futures, options, swaps) of companies operating primarily in the biotechnology and life sciences sectors.
Direxion was earlier known as Potomac Funds, which was founded in 1997. Potomac funds was involved in issuing and managing mutual funds and had issued inverse mutual funds much before launching inverse ETFs. It changed its name to Direxion in 2006 and launched its first inverse ETF in 2008. Inverse ETFs can also be leveraged. 3x leveraged ETFs invest 3 times (of its composition in the underlying index) in derivatives of an underlying asset. This way a 3X leveraged fund tries to gain three times the daily or monthly return of their respective underlying indexes.
The objective of 3x ETFs is to make higher utilization of day-to-day price movements. However, it is much more volatile and riskier than other leveraged ETFs, and unleveraged ETFs. Assuming an investment of $1000 in a 3x-leveraged fund, if the price of the benchmark index goes up 10% in the first month and then goes down 10% next month, the 3x leveraged fund will first increase to $1300 and then down to $910 in the second month. Thus, the initial investment of $1000 suffers a loss of 9 pe, which would otherwise have lost only 1 percent under normal circumstances.
Across the industry, there has been some serious introspection about this extreme volatility of highly leveraged ETFs. March 2020 was an interesting milestone for these leveraged funds. As we all know, March 2020 witnessed an unprecedented slump in the stock market due to the ongoing pandemic. This resulted in extreme levels of volatility in such highly leveraged funds. Due to this, the firms offering leveraged ETFs decided to reduce the leverage component. While some 3x ETFs were converted to 2X ETFs, some other ETFs were withdrawn. This makes me believe that only knowledgeable investors should consider investing in Direxion’s leveraged funds.