LABU: Direxion Daily S&P Biotech Bull 3X ETF

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 (before fees and expenses) of its underlying index, the S&P Biotechnology Select Industry Index. LABU seeks daily leveraged investment results and is intended as a short-term trading vehicle, not a long-term investment holding. You should not expect the fund to provide three times the return of the benchmark's cumulative return for periods greater than a day.

Understanding Direxion Daily S&P Biotech Bull 3X Fund (LABU)

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 (LABD).

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 (SPSIBITR). This is accomplished primarily through exposure to swap agreements and futures contracts that provide daily leveraged exposure to the index.

The underlying index is spread out over 169 different equity securities in the biotechnology and healthcare sectors. As of Dec. 31, 2020, the market capitalization for the index constituents ranges from $302.7 million to $189.2 billion.

LABU Characteristics

LABU was released to the public on May 28, 2015, and many viewed it as a direct challenge to the ProShares Ultra NASDAQ Biotechnology ETF (BIB).

The net expense ratio for LABU is 1.02%. 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.

The ETF has net assets of $771.1 million. The fund invests at least 80% of its net assets in financial instruments that track the underlying index. As of Sept. 30, 2021, the index top five holdings are Acceleron Pharma, Cytokinetics Inc, Sarepta Therapeutics, Seagen Inc, and TG Therapeutics.

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 their 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.

The Direxion prospectus for LABU lists various other risks investors should be aware of when considering an investment in the ETF. These include the effects of market volatility and compounding, derivatives risk, counterparty risk, intra-day investment risk, rebalancing risk, and healthcare sector risk.

The Bottom Line

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.