Direxion Drafts Quant, Volatility-Focused ETFs

August 16, 2011

Direxion plans expansion that moves beyond leveraged plays.

Direxion, the Newton, Mass.-based firm known for its lineup of leveraged and inverse funds, filed paperwork with U.S. regulators to market seven equities ETFs, some of which will rely on quantitative analysis to determine allocation between stock and cash instruments, while others eye volatility both domestically and in Latin America.

The proposed funds will each cost a net of 0.65 percent, which includes a fee waiver of 0.04 percent. They will also each tie up to 20 percent of their portfolios to derivative instruments in order to obtain leveraged and unleveraged exposure to their respective benchmarks, the company said in the filing.

The filing is Direxion’s latest move to expand its roster of ETFs beyond leveraged and inverse funds. Back in May, the company outlined plans to market nine single-exposure ETFs linked to India as well as three quant U.S. equity funds.

The funds and their respective strategies are:

  • Direxion Large Cap Insider Sentiment Shares will track through sampling the Sabrient Large-Cap Insider/Quant-Weighted Index consisting of 100 stocks picked from the S&P 500 pool. The index is quant-weighted, meaning the top 50 stocks are weighted exponentially, while the bottom 50 are equal weighted.

    The strategy eliminates companies with “very aggressive accounting” and ranks the remaining securities through quantitative analysis that screens for insider buying, frequency of trades and positive earnings analysis, the filing said. The index rebalances quarterly.


  • Direxion All Cap Insider Sentiment Shares will track the Sabrient Multi-Cap Insider/Analyst Quant-Weighted Index. It too applies the same quantitative methodology and weighting strategy as the Large Cap fund, except that it will select 100 stocks from the S&P 1500 universe and include companies of large, mid and small capitalization.


  • Direxion Large Cap Tactical Advantage Shares, which will track the Dow Jones Golden Cross Index, splits its portfolio between equities included in the Dow Jones U.S. Large Cap Index and cash equivalents, including T-bills. It is designed to adjust its weighting between stocks and cash based on technical factors called the “golden cross” and the “dead cross.”

    “The Golden Cross occurs when the 50 day moving average of the Dow Jones U.S. Large Cap Index crosses above the 200 day moving average,” the filing said, adding that the “dead cross” is the opposite event. A golden cross causes the index to allocate 100 percent to stocks and eliminate the cash component, while a dead cross means that 25 percent of the basket is tied to stocks and 75 percent to cash. That rebalancing happens daily.


  • Direxion S&P 1500 Volatility Response Shares will track the S&P 1500 Risk Control Index in an effort to “respond to the volatility” of the S&P 1500 Index by establishing a volatility target that adjusts stocks and cash instruments allocations based on realized volatility of the S&P 1500, the filing said. Higher volatility means bigger cash allocation and smaller exposure to stocks.


  • Direxion S&P 600 Volatility Response Shares will track the S&P 600 Risk Control Index. The fund is similar in construction to the S&P 1500 Volatility Response Shares ETF, but it only taps into the S&P 600 pool, which consists of companies with a market capitalization between $300 million and $1.4 billion.


  • Direxion S&P 500 Volatility Response Shares, which will track the S&P 500 Risk Control Index, is another more-focused version of the ETF tapping into the S&P 1500.


  • Direxion S&P Latin America 40 Volatility Response Shares is the only international equity ETF of the bunch. It will track the S&P Latin America Risk Control Index, which eyes volatility in the S&P Latin America 40 Index, which includes the largest names in Brazil, Chile, Mexico and Peru. It too sets a volatility target and adjusts its holdings accordingly between stocks and cash equivalents. The index may be rebalanced daily, the filing said.


The company did not specify in filing tickers for the funds.


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