As of July 10, 2015, the Direxion Daily Small Cap Bear 3X ETF (NYSEARCA: TZA) has a year-to-date market return of -19.5%. Since the inception of the Direxion Small Cap Bear 3X ETF on Nov. 5, 2008, the fund has a market return of -58.94%.

The TZA seeks to provide 300% of the inverse of the daily performance of the Russell 2000 Index, which serves as one of the main benchmarks for tracking U.S. small-cap stocks. The holdings of the TZA consists of multiple derivative contracts, such as the Goldman Sachs Financial Square Funds - Treasury Instruments Fund, the Russell 2000 Index Swap and the Dreyfus Treasury Prime Cash Management/Institutional Fund.

The Direxion Daily Small Cap Bear 3X ETF consists of multiple Russell 2000 Index Swaps, which are the top holdings of the fund. These swaps are derivative contracts, in which one party exchanges one cash flow with another party's cash flow on specified dates. The cash flows, which are exchanged, are associated with the Russell 2000 Index.

Characteristics

The Direxion Daily Small Cap Bear 3X ETF is structured as an open-ended investment company, which is a type of security that allows for readjustments in investment criteria and fund size. TZA is an inverse leveraged ETF that is listed on the New York Stock Exchange Arca Exchange.

As of June 29, 2015, the fund has $707.37 million in assets under management, and it is managed by Direxion Investments. The fund has a net expense ratio of 0.98%, which is slightly greater than the category average of 0.95%. The net expense ratio includes management fees and other operating expenses. However, this ratio does not include broker fees. The fund can maintain a relatively low expense ratio due to the agreement of its advisor, Rafferty Asset Management, LLC, which has agreed to cap its management fee through Sept. 1, 2016.

Suitability and Recommendations

As of June 29, 2015, TZA has a trailing five-year alpha of -8.97, a beta of -3.35, a mean annual return of -5.42%, a standard deviation of 45.85% and a Sharpe ratio of -1.42. According to modern portfolio theory (MPT), based on trailing five-year data of the Direxion Daily Small Cap Bear 3X ETF's Sharpe ratio, investors who are long the TZA have taken on more risk than they were returned. This negative Sharpe ratio indicates that long-term investors are better off investing in a security that returns the risk-free rate.

The fund's alpha of -8.97 indicates that it underperformed the MSCI ACWI NR USD Index by 8.97%. Its beta of -3.35 indicates that the Direxion Daily Small Cap Bear 3X ETF is inversely related to and experienced 335% more volatility than the MSCI ACWI NR USD Index.

TZA is an aggressive fund that only aims to track the Russell 2000 small-cap index on a daily basis. Therefore, the fund is recommended for speculators and day traders who aim to track small-cap stocks and only plan to hold TZA for no longer than one day. Since the TZA only seeks to provide a return that is -300% of the daily return of the benchmark, investors who are long for more than one day can be affected by the compounding characteristic of the ETF. This causes the actual returns to deviate from the expected -300% return of the Russell 2000 Index.

Investors who plan to hold the Direxion Daily Small Cap Bear 3X ETF for longer than one day need to adjust their position on a daily basis to ensure that the effects of compounding do not impact the position. Daily readjustments ensure the expected -300% return of the Russell 2000 Index.