AMZU ETF: A Leveraged Amazon Strategy For Investors Seeking To Amplify Performance

The Direxion Daily AMZN Bull 2X ETF (AMZU) is a leveraged exchange-traded fund designed to provide 200% the daily performance of Amazon.com, Inc. (AMZN) shares. While leveraged strategies can amplify an investor’s performance with less capital committed to a trade, these ETFs bear significant risks and caveats that must be considered when evaluating whether taking on additional risk is appropriate for one’s trading strategy, particularly if intended for a holding period longer than a single trading day. For those seeking inverse exposure to AMZN shares, the Direxion Daily AMZN Bear 1x ETF (AMZD) can be employed.

Before trading this strategy, investors must set strict sell discipline in order to protect their portfolio from significant losses.

About Direxion Daily AMZN Bull 2X ETF

AMZU was launched on September 7, 2022, by Direxion as part of its leveraged single-stock daily ETFs series. AMZU has an expense ratio of 99 bps, aligned with peer leveraged strategies on the market offered by peers like ProShares, GraniteShares, Tradr ETFs, T-REX, Defiance, and Leveraged Shares.

There are a number of factors to consider when evaluating a leveraged ETF, including liquidity, volatility, and expected stock performance.

Given that these funds were designed to be actively traded, liquidity should be the top priority when deciding if a leveraged ETF is appropriate for a trading vehicle. Liquidity can influence the bid/ask spread, or the investor’s ability to enter and exit a position without incurring additional costs. A wider bid/ask spread will result in costlier trades, especially when considering that these funds are meant for intraday trading.

Volatility can also significantly influence the performance of both the fund and the trade. Leveraged funds were designed to trade at a multiple above the performance of the underlying stock on a daily basis. Increased volatility may result in some divergence between the stock and the target performance of the leveraged ETF. As for the trader, a more volatile trading environment can result in larger swings on which to capitalize. For those seeking to employ a leveraged ETF for long-term exposure, volatility can create a drag on performance, meaning that a more volatile environment can negatively impact the leveraged ETF’s performance even if the underlying stock appreciates in price over time.

Expected stock performance, while fundamental in nature, can set the direction of the stock and the leveraged fund. This performance metric is more applicable to those seeking to utilize leveraged strategies for a longer investment horizon, as fundamentals generally do not influence the day-to-day performance of a stock. If the investor expects the stock to perform positively over their intended holding period, the leveraged ETF can generally be expected to amplify performance, though it may bear volatility drag risk. Given the structure of leveraged funds, holding these strategies for longer than a single trading day will result in compounded performance, which can result in returns beyond the intended 200% daily target. Investors need to consider that 200% daily exposure can result in compounded losses that may be unsalvageable.

Compared to peer leveraged AMZN ETFs, AMZU exhibits the most liquidity with an asset base of $280 million and a daily average trading volume of $84 million in share value at the time of writing.

Structure of AMZU

AMZU employs both direct equity exposure and swap derivatives in order to return 200% the daily performance of Amazon shares. Swap derivatives were designed to exchange the performance of the underlying asset for a fixed rate, settling in cash at the close of the trading day. In this case, AMZU holds Amazon swap derivatives that leverage the portfolio’s exposure to Amazon shares. As a result of the daily settlement of the swap derivatives, AMZU will exhibit a similar daily reset that will influence the performance of the ETF over time. Given that performance is based on the rate of change rather than on the nominal value, returns will be amplified over time, though they will be weighted to the downside. For example, if an investor were to deploy $100 in AMZU and Amazon were to appreciate by 1% on the first trading day, the investor would close that day with $102. If Amazon were to decline by 1% on the following trading day, the investor would close with $99.96.

Investor Suitability and Strategy

AMZU will primarily be employed as a trading tool for daily exposure given the amplified risks associated with holding leveraged funds for longer investment horizons. Given the risky nature of the fund, the ETF may be most appropriate for experienced traders that exhibit greater risk tolerance. Active trading will be more tactical in nature and will require a greater understanding of technical analysis in order to be successful when trading AMZU. Traders may employ a number of strategies when analyzing a stock chart, including simple moving averages [SMAs], relative strength index [RSI], exponential moving averages [EMAs], and time squeezes, amongst other tools.

An extended investment horizon may be more intricate when compared to directly investing in the underlying equity given the risk of volatility drag and NAV erosion. An investor can expect AMZU to amplify the returns of Amazon shares during normal market operations. During periods of heightened market volatility, AMZU can significantly underperform Amazon shares even if Amazon shares were to ultimately go up in price. Volatility and compounded risk are the greatest factors to consider when evaluating if AMZU is appropriate as a long-term investment strategy. An investor’s entry point can make a significant difference to the overall performance of the investment.

Before making an investment decision, investors and traders must consider the tax implications when trading these funds. Actively trading leveraged strategies may expose traders to greater short-term capital gains taxes on top of management fees, bid/ask spread risk, and brokerage fees.

Given the risky nature of trading leveraged ETFs, investors and traders must set predetermined trading parameters before entering a trade. Strict risk management protocol is advised. Sell discipline is a must.

You can review additional risks here and the SEC bulletin here.

Final Thoughts

AMZU is a 2x leveraged ETF designed to provide 200% the daily performance of AMZN shares. AMZU should primarily be used for daily exposure, though it may be used as a long-term investment strategy if the investor expects equity growth and limited volatility risk. Given the risky nature of leveraged investment strategies, investors and traders must adhere to strict risk management protocol and fully understand the consequences of an adverse trade.

This article answers three questions about AMZU:

1. How does AMZU reflect the daily movement of Amazon shares?
2. What risks accompany using AMZU?
3. Which tools can investors use to trade AMZU in their portfolio?

Editor’s note: This article is intended to provide a general overview of the ETF for educational purposes only and, unlike other articles on Seeking Alpha, does not offer an investment opinion about the ETF.