Direxion Moves From 2X to 3x Leveraged ETFs
November 22, 2011
Direxion, the Newton-Mass.-based purveyor of leveraged and inverse funds, is shifting leverage on all 10 of its existing double-exposure ETFs to triple exposure, effective Dec. 1. The move is aimed at aligning the funds with the company’s reputation as the premier sponsor of triple-leveraged ETFs.
The company’s plan to make all of its leveraged ETFs triple-exposure funds is a response to market demand for leveraged products with more, not less, leverage, according to Andy O’Rourke, Direxion’s director of marketing.
“The people who use these products are active traders who are trading largely on momentum, or using other strategies that are highly researched,” O’Rourke said in a telephone interview.
“Essentially what we have is a group of traders who have a lot of conviction as to which way they want to trade a given sector or asset class, and so with that amount of conviction, they actually prefer the higher leverage point,” he added.
Many of the traders who are invested in Direxion’s leverage products are high-frequency trading groups that trade all day, often buying and selling in a matter of minutes. O’Rourke said that some traders might consider holding leveraged funds for a week, but generally not for longer periods.
Leveraged ETFs contain the potential for huge rewards but the losses also can be substantial, especially in the case of volatile markets. Most investors don’t have the stomach or the expertise for the roller-coaster rides that these funds take.
A 1 percent increase in a bull market will be a 3 percent increase in a leveraged fund, minus fees and expenses. However, the reverse is true in a bear market. A 1 percent decrease will cause a 3 percent decrease for the fund, and over time, leveraged funds that rebalance daily can deviate significantly from the returns of their indexes, according to O’Rourke.
“You always need to watch them [leveraged ETFs] very closely, because your exposure levels can change because of how they reset every day,” O’Rourke said.
The 10 funds, five bull-and-bear pairs, and their current and future names are:
The funds' tickers will all stay the same, O’Rourke said.