AMZU: Not The Right Time Unless Risk-Tolerance Is High

I’ve covered a lot of leveraged ETFs in my short time writing on Seeking Alpha, and most of them have gotten excellent responses from readers. It dawns on me, therefore, that this relatively minor class of ETFs is only ‘minor’ because it’s not as widely understood. Therefore, I see this as providing a valuable service to readers looking for that extra edge or alpha using nontraditional methods that were, until now, only the purvey of expert traders. With these types of ETFs, anyone willing to pay the price (read as expense ratio) can benefit from the high yields and price returns these ETFs offer. Not all, mind you, but in the current bull market, most of the leveraged bull ETFs have given great alpha exposure for investors willing to take the plunge.

Thesis: AMZN itself isn’t showing enough price momentum over the past month for a relatively safe AMZU play. Hold and wait for a stronger bullish rally.

Introducing AMZU, a Bullish 2X Leveraged Play on Amazon Inc.

One such ETF in Direxion’s repertoire is the Direxion Daily AMZN Bull 2X Shares ETF (NASDAQ:AMZU). The company itself has about $38 billion in AUM, but this particular fund is one of the smaller offerings, with an AUM of around $105 million at the current NAV of $34.75 against an ETF share price or market price of $34.41 at Friday’s close. Remember, this is a ‘daily’ ETF, which means rebalancing is done after every trading day. Nevertheless, most of these funds have very tight spreads when it comes to the market share trading at a premium or discount to NAV. There are several reasons, such as arbitrage and redemption, which essentially involve traders and institutional investors redeeming or selling the ETFs to purchase the underlying asset, which in this case would be Amazon Inc (AMZN) stock. The workings are more complex than I make it sound, but for most retail investors, it’s enough to know that when an ETF is trading at a premium to NAV, it’s generally considered to be in high demand. You’re likely to see that effect in the daily trading volumes, but it’s not something you need to worry too much about.

The bigger issue is the expense ratio. I take the view that if you’re getting exposure to something that requires expertise and close watching, it’s worth paying the price. From that perspective, the 1.06% expense ratio seems quite reasonable. Moreover, the advisor of this fund (as is the case with many such funds) has:

… contractually agreed to waive all or a portion of its management fee and/or reimburse the Funds for Other Expenses through September 1, 2025, to the extent that a Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable, among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses). If these expenses were included, the expense ratio would be higher.

That’s something to make note of. Other than that, you’d basically trade this like any other leveraged ETF, only holding on to it for a day or a few days at the most. I’ve discussed leveraged ETF risks extensively in earlier articles, and I encourage you to read them, as well as visit the SEC’s and FINRA’s web pages that outline the risks for retail investors.

AMZU Holdings, Strategy, and Performance

AMZU uses a strategy involving swaps on AMZN. These contracts are entered into by the fund manager with large global financial institutions, and the swaps are complemented with a portion of the holdings invested in treasuries and money market funds. The fund also holds some amount of AMZN stock. These holdings are usually quite dynamic and can change from day to day. Here’s where you can keep track of what the fund holds on any given day.

I’d like to say that the strategy has worked really well, but unfortunately that’s not the case. The yield on this ETF is quite low, and some quarters don’t even have dividend payouts. Over the course of the fund, since inception, the total dividend payout has only been about 85 cents, not including the short-term capital gain recorded in the last quarter of FY23, as shown in the table above.

Okay, so the yield isn’t what investors should come for, but what about the fund’s price performance? Although it would be inaccurate to expect 2X the returns of AMZN in any time period other than a single day, you’d expect some evidence of that leverage working in your favor. Unfortunately, even as AMZN appreciated by 52% in the past year, AMZU shows a lackluster price return of only 62%. Of course, AMZN doesn’t pay a dividend so if you add the fund’s marginal yield over time, you’d get to about 67%.

The attractiveness of that risk-reward tradeoff depends on the investor, of course. If you think a 15% yield over and above the return on your core AMZN holding is worth the additional costs that short-term trading on this ETF would incur and the elevated levels of risk it involves, that’s great. Most investors wouldn’t find that reward sufficient for the added risk they’d be taking, particularly when there are now so many single-stock ETFs to choose from that focus on companies that are growing much faster than Amazon – and appreciating in value much faster in terms of market capitalization, which is more to the point.

Concluding Notes and A Final Risk Warning

The chief consideration here is whether or not this will help boost your AMZN earnings and offset any paper losses you might have incurred when AMZN was in correction phases over the past year.

I could definitely build a bull case by stating that even if the total return on AMZU is not as attractive as you’d like it to be, at the very least, you can continue to look for opportunities to recoup those paper losses, thereby maximizing your unrealized gains for the rest of the year. For example, there are several opportunities that presented themselves as windows for a leveraged ETF play. If you look at some of the straightforward momentum indicators like the rate of change or the relative strength index, you’ll spot these.

As shown above, RSI and ROC have been very useful (in hindsight, of course) to help you spot these opportunities when momentum is going your way, but they’re essentially leading indicators so watching them closely to see how they’re trending over time will give you a quick window of opportunity to enter and exit a trade.

You can also validate them using other indicators such as OBV or On Balance Volume, which shows you the changes in average buying and selling volume for a series of periods. As shown below, the OBV indicator shows days with strong buying volume surges, which can complement what the other momentum indicators are telling you.

In order to do this, however, you’d need to employ the right technical indicators and gain a better understanding of how they work and what signals they throw out under what circumstances, and I’ve briefly explained how to do this in a recent article on (FBL), another leveraged ETF that focuses on Meta Platforms (META). These momentum indicators are very helpful in gauging whether or not the underlying stock is moving in your favor, and how strong that movement is. The stronger that momentum, the more days you can hold on to your AMZU shares.

However, be warned that the ideal trading period for these leveraged products is no more than a single day, and if the momentum continues to look good, a couple more days – at the most! Some investors might disagree and tell you that the beta slippage isn’t as bad as it’s made out to be or that it’s relatively safe to hold for longer periods when momentum is very strong. Take those with the customary pinch of salt, as you should anything I say as well. When you’re trading with real money, you’re always on your own. Make no mistake about that.

For now, it would be unconscionable for me to recommend trying your hand at AMZU, simply because AMZN itself has been quite erratic over the past few months, and this is not the kind of volatile situation you want to be in when dealing with non-traditional, leveraged products. June was looking to be a great month for the retail and tech giant, but I do see some downward pressure that’s created a temporary resistance level right above $186 or so. Combined with a price to forward earnings multiple of +40x as of this writing (not expensive, per se, but well above the sector median), the ongoing labor problems, and a macro environment that’s not exactly conducive to any kind of continued strength in consumer discretionary spending, I think investors should tread very carefully within the retail segment as a whole.

As a result, I’m unable to give this ETF anything but a Hold rating for now, with a caveat that there will still be bull-momentum opportunities present even in distinctly downward markets. You just need to have the skills and the risk-tolerance for it.

This is all my opinion only and not a recommendation of any kind. Please conduct your own due diligence before purchasing any security. Thanks for reading the article. I appreciate your comments and thoughts.