Transcript:
Caroline Woods:
Micron earnings are coming up. And for investors looking to make a bigger bet on the stock, there is an ETF for that. Bilal Little is global ETF strategist at Direxion joins me now to break down how leveraged single stock ETFs work and the risks investors need to understand below. Great to have you.
Bilal Little:
Thank you for having me. Excited to.
Caroline Woods:
Be here. All right. So we have micron earnings on Wednesday. If you’re bullish going into the report why would you use a leveraged micron ETF instead of just buying micron.
Bilal Little:
Yeah I think the first thing to do is to step out to say what is the opportunity in micron. Right. This is one of the best stocks in the market. More importantly there are only three stocks that are really leading the memory space. It’s Micron, SK Hynix and obviously Samsung. Micron has 86% operating margin. So the business is really set up fundamentally to be really strong.
Bilal Little:
What we’ve seen historically is over the last eight quarters, micron has actually outperformed really, really well going into that trade. Most traders would want to allocate capital going in because the following week, three out of the last four weeks, the stock has actually traded down -3.4%. So very important tell. So the question is why do you use an ETF for leverage or exposure.
Bilal Little:
It’s because if you didn’t have a margin account or you wanted to do options because of the cost and because you would actually have to commit more capital, possibly with a margin call, you would want just pure exposure into that with leverage. Now here’s how you get the leverage. Because we use derivatives, which is a swap. Very simple story here.
Bilal Little:
Most traders and investors, they already use derivatives. They’re either going to trade a futures contract or in the open market, or they’ll also trade options. Well, the other derivative that they may not be privy to is a swap. Well, that’s between an ETF issuer and a financial institution. That basically gives you daily leverage like we have in the name of our product to the underlying stock.
Bilal Little:
And that’s daily exposure. The best part about that is the investor gets that in a single tick or trade.
Caroline Woods:
So if we have long term investors the buy and hold investors tuning in right now, should they tune out or does this apply to them as well?
Bilal Little:
It absolutely applies to them.
Caroline Woods:
Not just short term trades.
Bilal Little:
No. Let me take a step back. I think it applies to them to follow what’s happening in the trade. Right. So they can have multiple ways to actually look at what’s happening inside of micron. You can actually look at leveraged ETFs because you’re seeing 25 to 30 million shares traded obviously on the individual stock. But then you can see complementary volume being traded into some of the leverage products.
Bilal Little:
So I think it gives you a total view of how that trade is setting up behind the individual stock. Here’s why they should be mindful if they’re a long term investor. These products are designed for daily traders. These are not designed for buy and hold passive investors that have a long term time horizon. That is why, in the name of all of our positions and individual ETFs, we have daily leverage.
Bilal Little:
We want to imply that because we need to lean in the air or on the side of education, because investors sometimes have that mis misconstrued.
Caroline Woods:
So the options market is pricing in basically a 10% move in micron after earnings. What happens to a two micron ETF if the stock moves 10%.
Bilal Little:
Yeah sure. Perfect. So great setup. The way it’s designed is to give you 200% exposure to that 10% effectively. Which means if that moves 10%, that product should theoretically move 20%. But that compounding could work in your favor. If that stock trades multiple days to the upside because the leverage resets every single day. Now I want to be very clear and very transparent.
Bilal Little:
That leverage can actually hurt you to the downside, right. Because if that stock moves down 10%, that exposure that you would have in the ETF would go down 20%. And this is where investors really need to think about the impact of loss. Because if you lose 10%, you need 11% to get back to even if you lose 50%, you need 100% to get back to even.
Bilal Little:
And we need to spend time with investors making sure that they understand how these products trade and how obviously they play in the market.
Caroline Woods:
So based on the fact that micron could trade lower after earnings based on what we’ve seen, would you want to leverage up heading into earnings.
Bilal Little:
Yeah. Why not. And then let me say it this way not why not. As if it’s so casual and cavalier. If I believe there’s a bullish setup in technical setup, let’s be honest. The stock is priced to target somewhere between 1500 or so. Buy 49 of the S&P top traders on the market right now.
Caroline Woods:
But those are 12 month price targets.
Bilal Little:
They are 12 month price targets. However the stock has actually traded up going into earnings or coming out of earnings over the last couple of sessions. The week after, however, the stock has precipitously sold off. Right now, the stock is off 20% from its high. It’s never reached. Its 221255 price target. And right now is trading somewhere between 1056 or so.
Bilal Little:
If that’s the case, that means there is a true opportunity in which leverage could actually help you for a day or so. And then obviously you might want to take that trade off.
Caroline Woods:
So you need to know when to get out. Absolutely. Same time. Okay. So kind of zooming out. Yeah. Where are you seeing the most interesting setups for leveraged ETFs in the market right now outside of micron.
Bilal Little:
Well a few areas. One I think investors are still watching and trading around energy. Obviously the volatility in the Middle East obviously presents an interesting opportunity nonstop. In addition to that, I actually see a lot of flows around the long into the curve. Right. So investors and traders are actually watching what’s happening obviously around the 20 and 30 year Treasury bonds.
Bilal Little:
In addition to that, I think a very interesting area for volatility that we’re seeing is actually around Bitcoin because you actually seen a decoupling from the dollar as well as what’s happening in the rest of the market. One last area that I think we’re going to be watching very closely is, I would say cybersecurity stocks, particularly if you start to look at the Palo Alto Networks of the world and some of these other stocks, those will do well.
Bilal Little:
Given we constantly see headlines around what’s happening with some of these obviously AI breaks. Last point that I would point out, and I think this is interesting right now, one thing that I’m watching is the trade of SK Hynix and conjunction. What’s happening with micron, because this is the second player up. And although we see a lot of momentum obviously around micron, SK Hynix is clearly touching a bit as well following some of the momentum behind micron, because you’re talking about stocks that have, you know, 100 plus billion dollars in contract agreements locked up for the next two years.
Bilal Little:
Structurally, we haven’t seen this level of demand in these types of positions in a very long time. The sector has historically moved in a very cyclical manner. It’s now moving in a secular, secular manner to the upside, and I think that’s what we’re watching.
Caroline Woods:
So you mentioned the flows data. Yeah. As you look at the leveraged ETF market, are you seeing more interest or positioning in betting on the upside or the inverse products that are betting on the betting to the downside?
Bilal Little:
I think it’s asset class, security specific. And I’ll give you a perfect example. Last week we saw $650 million in shorts being wiped out or bears being wiped out on the Bitcoin trade. And that’s because the trade actually popped to the upside. It broke through its 825, price target ceiling or ceiling. What we’re seeing I would say in other areas I’d say the market is actually moving underneath, into various sectors very stealthily.
Bilal Little:
Obviously there are a lot of macro headlines and data. Also right now, like consumer sentiment is very, very low. And we already know what’s, how they’re feeling as far as their, their purse strings go. So, again, I just to take a step back. I think it’s all asset class and price, you know, security specific.
Caroline Woods:
Where is there a lot of positivity?
Bilal Little:
It’s a good question. I think, I think Bitcoin. I think the debasement trade is very alive and well. I think, investors are really watching this price target of, I mean, this price handle a 5% on the ten year Treasury. I think right now you’re seeing a bit of a barbell approach as well. You can get paid to be on the front part of the curve without taking on too much risk in your portfolio.
Bilal Little:
So I think you’re going to see that from companies as well. When you start thinking about insurance companies, they’re going to take that. They’re going to take that free cash at some point. And I don’t necessarily know what’s going to be the catalyst going into the back of the year to continue to allocate to equities if volatility starts to pick up.
Bilal Little:
The VIX obviously hasn’t traded significantly higher.
Caroline Woods:
So within tech where do you see the best setup. Is it within the Nasdaq overall semiconductors software.
Bilal Little:
You know we’ve been talking about this direction for the last I would say a month or so. We think that broadening out trade is really materializing. So we’ve been looking at equally way to cuz triple QE is the product that we offer. This is an a position for direction. I think this is a position for the market, given the fact that you actually see other pockets in the market doing very well.
Bilal Little:
Again, I just mentioned, I cybersecurity stocks that have done well. You look at obviously what’s happening in memory, even if you looked at the Mag seven, the concentration of the Mag seven over the last 3 or 4 years. Year by year, they’ve actually performed lower. However, the expansion in AI going into these other areas and you saw this with, Salesforce, you’re starting to see how I can actually permeate into other areas of business.
Caroline Woods:
But those are all tech companies.
Bilal Little:
There are tech companies. I don’t think any company is not a tech company today, because the component of data, McDonald’s is arguably a tech company as well. When you start to think about it, and I think that’s the part in society that we have to embrace.
Caroline Woods:
So what’s the takeaway for the everyday retail investor who’s watching?
Bilal Little:
Let’s say they’re two one. Keep a very close eye on rates and yields because the bond market is really driving I would say, repricing the cost of capital as well as risk. The second point is I would take a very hard look at the concentration risk in my portfolio, and I would think broadly about what the, opportunity set is with a more diverse portfolio set.
Caroline Woods:
Okay. So when you say keep a close eye on yields, what specifically are they looking for?
Bilal Little:
I think you put me on the spot. I would say a five and a quarter ten year treasury would be. And then it would be very interesting to where you see one volatility pick up. Two, I would see a rotation into fixed income.
Caroline Woods:
And that might mean that stocks move lower. But ultimately are you bullish or bearish on the market. Would that move lower be a buying opportunity.
Bilal Little:
I think it becomes a trader’s market where it is today. It still is a trader’s market. I think it becomes even more volatility actually is a trader’s, ideal environment. Right. Because you have a lot of price movements for a long term investor. I would stick to that barbell approach, meaning having, paying a close, sorry, paying close attention to what’s happening in fixed income, possibly getting paid for the yield, right, or sitting in the sidelines and then obviously looking at where I could place my bet on equities.
Caroline Woods:
Okay. So if we want to quickly pivot to rapid fire this of that quick questions, quick answers. My first question for you in that case is stocks or bonds from here stocks. If we see five and a quarter on the ten year stocks are bonds.
Bilal Little:
I would still say I would still say stocks based off your risk tolerance okay.
Caroline Woods:
All right. Micron into earnings bullish or bearish bullish buy before earnings or wait until after.
Bilal Little:
I can’t I would be mindful. But I would say buy before.
Caroline Woods:
Semiconductors or broader tech. Both leveraged ETFs trading tool or investing.
Bilal Little:
Tools trading tool only.
Caroline Woods:
Better set up for leverage breakout or dip.
Caroline Woods:
Dip better for leveraged ETFs. Strong trend or high volatility? High volatility how long is too long to hold a leveraged ETF?
Bilal Little:
Past a day?
Caroline Woods:
Past one day. More dangerous mistake using too much leverage or holding too long.
Bilal Little:
Would be.
Caroline Woods:
More dangerous. Mistake. Using too much leverage or holding to lock.
Bilal Little:
Well, leverage is how it’s managed in your portfolio.
Bilal Little:
Holding too much leverage and not understanding the risk.
Caroline Woods:
One area where you would not use leverage right now has a.
Bilal Little:
Fixed income.
Caroline Woods:
Biggest red flag that tells you not to use leverage.
Bilal Little:
Education.
Caroline Woods:
What does that mean?
Bilal Little:
If you don’t understand how products trade and what leverage is? I would not be using leverage.
Caroline Woods:
So if they didn’t understand what you just said in this interview, avoid.
Bilal Little:
100%.
Caroline Woods:
Finish the sentence. A leveraged ETF is the wrong product.
Bilal Little:
When you don’t know what leverage is, you don’t know what a derivative is. You don’t understand how the product is structured.
Caroline Woods:
And it’s the right product.
Bilal Little:
When you know what leverages, you know how the product is structured and you have conviction in the trade setup.
Caroline Woods:
All right. Well I little I appreciate you joining us. Thanks so much for shedding some light on that space.
Bilal Little:
Thanks for having.
Caroline Woods:
Me. That’s Bilal Little global ETF strategist at Direxion.
