The Direxion Daily S&P Biotech Bull 3x Fund (NYSEARCA: LABU) is an exchange-traded fund (ETF) that seeks to replicate 300% of the daily performance of its underlying index, the S&P Biotechnology Select Industry Index. Its portfolio also contains some exposure to the SPDR S&P Biotech ETF.
LABU seeks daily leveraged investment results and is intended as a short-term trading vehicle, not a long-term investment holding. The word "bull" in the title indicates that the fund is meant to appreciate when the underlying index performs well. Direxion does have an inverse sister fund for LABU: The Direxion Daily S&P Biotech Bear 3x Shares ETF.
Unlike a traditional ETF, LABU is not a collection of holdings designed to mirror an index; instead, this fund is a daily 3x leveraged bet on the performance of the S&P Biotechnology Select Industry Index. This is accomplished through exposure to options and derivatives contracts, which are subsequently rebalanced at the end of every trading session.
The underlying index is spread out over nearly 90 different equity securities in the biotechnology and healthcare sectors. This index has performed well since the financial crisis of 2007-08, largely on the back of merger and acquisition activity and the influence of the Affordable Care Act.
LABU was released to the public in May 2015, and many viewed it as a direct challenge to the ProShares Ultra NASDAQ Biotechnology ETF.
The expense ratio for LABU is contractually capped at 0.95% through an arrangement between Direxion and the fund adviser. However, administrative fees do not really matter much for daily traded funds, because an investor is exposed to them for so short a period of time. Trading fees and other account expenses are much more important for this ETF. These fees occur independently from the investment and vary depending on platform and brokerage.
This is a very small ETF. Its $91 million in assets under management (AUM) is less than one-eighth as large as the ProShares Ultra NASDAQ Biotechnology ETF. The only competitive advantage that LABU could have over the ProShares ETF at this point is added exposure: The ProShares ETF is 2x leveraged, whereas LABU is 3x leveraged.
Suitability and Recommendations
Any funds that pursue daily leverage are riskier than alternatives without leverage. Leveraged ETFs magnify the gains and losses of their underlying indexes. If the S&P Biotechnology Select Industry Index suffers losses of 10% over the course of one trading day, an investor holding LABU is liable to lose up to 30% or more.
As an extreme case, it is possible for an investor to lose all of his money if the underlying index moves more than 33% on a given trading day. Also, daily leveraged ETFs are ill-suited for long holding periods. The return for LABU will suffer time decay; the day-to-day volatility in the fund's returns often mitigate its leveraged design.
As of mid-2015, LABU had not yet produced enough performance history to generate any reliable risk measurables. Standard biotechnology ETFs tend to have low betas (in the range of 0.55 to 0.75) and low-to-moderate standard deviations (ranging from 8.5 to 15). However, the 3x leveraged aspect of LABU is likely to force volatility measurements much higher than that.
LABU is designed for and best used by sophisticated investors. Interested buyers should understand the risks of using leverage and the consequences of daily leveraging, and they should be comfortable in a daily monitoring capacity for their investments.
This ETF represents an opportunity for short-term speculation on biotechnology stocks in the United States. It should not be held for even moderate periods of time, and it cannot reasonably form part of a core or satellite portfolio.