Last Friday, I wrote about how Apple stock (AAPL) – Get Free Report bears could benefit from an eventual decline in share price by simply holding shares of a fund, the Direxion Daily AAPL Bear 1X Shares. It aims to deliver the inverse of the daily returns in AAPL.
While this fund can be valuable for Apple bears, another one within the Direxion portfolio can be a good fit for traders with the opposite view on Apple stock: bulls who would like to earn a multiple of AAPL’s daily returns.
Today, I talk about the Direxion Daily AAPL Bull 1.5X Shares (AAPU).
Figure 1: Apple Stock Mega Bulls: Here’s How To Supercharge Returns
Unsplash
Read also: Think That Apple Stock Could Tank? Here’s How To Profit
Why Apple Stock Could Rise
Before talking about AAPU, it may be worth revisiting the main reasons why one might want to turbocharge a bet on Apple stock.
From a long term perspective, Apple could benefit from a handful of growth opportunities in areas like mixed reality and automated vehicles. Since both initiatives are so nascent, I doubt that most analyst models even account for the future financial impact of either.
Looking at the medium term, Apple stock remains in deep correction mode – down 18% for the year so far. I have discussed many times that, historically, buying AAPL after a 15%-plus pullback tends to produce much better 12-month forward returns.
Figure 2: Average one-year return on AAPL, by strategy.
DM Martins Research
Focusing a bit on the short term, it is clear that Apple has been facing issues with iPhone Pro sales in the 2022 holiday quarter due to supply disruptions in China. However, most of these risks may already be priced in the stock.
A post-earnings rebound in January, once the challenges become water under the bridge, is not out of question.
AAPL Returns on Steroids
Let me make one thing clear: simply holding AAPL shares can already be plenty of risk and reward assumption for most investors. Since the 1980s, Apple stock has produced annual gains of 22% (11 percentage points above the S&P 500) and volatility of 43% (3 times the index’s).
Owning shares of AAPU turbocharges the returns in AAPL (positive or negative) by a factor of 1.5 times the daily gains or losses. Of course, also expect volatility to increase by 1.5 times, if not even a bit more.
The graph below, provided by Stock Rover, shows that AAPU has moved consistently with the ups and downs of Apple stock, but with more extreme highs and lows.
For instance, AAPU was up 9% inception-to-date in mid-August, when AAPL had gained a more modest 6%. But because Apple shares dipped quite a bit in the following weeks, AAPU magnified the losses. Today, AAPU is down 19% while AAPL has declined 11%.
Figure 3: AAPU vs. AAPL.
Stock Rover
A Very Important Word on Risks
When owning leveraged funds like AAPU, investors and traders need to be aware of a few pitfalls. The most important is that the Direxion fund tries to replicate 1.5 times the daily returns in AAPL. There is no guarantee that AAPU will achieve the same goal over weeks or months.
In fact, the higher the volatility in Apple stock, the more likely it is for AAPU to disappoint fund share holders over longer periods of time. Therefore, AAPU may be better suited for short-term bets on the direction of Apple shares.
Fund manager Direxion describes this issue as follows:
“Longer holding periods and higher volatility of AAPL increase the impact of compounding on an investor’s returns. During periods of higher volatility, the volatility of AAPL may affect the fund’s return as much as, or more than, the return of AAPL.”
AAPU charges an annual fee of nearly 1%, which could eat into an Apple mega bull’s profits if the 1.5x long exposure is held for a while.
Lastly, AAPU trades lightly: 65,000 shares per day on average, according to Yahoo Finance, or the equivalent of $1.3 million. Therefore, active traders should think through potential issues regarding liquidity and bid-ask spreads.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Apple Maven)
