Direxion ETFs has been a pioneer in the leveraged and inverse space for roughly a decade. The issuer was among the first to offer 3x leveraged and inverse ETFs, and now has begun to expand its lineup in other directions. David Mazza joined Direxion in 2018 from Oppenheimer Funds as a managing director and head of product. Here, he discusses his firm’s diversifying lineup and strengths.
How would you classify the different kinds of funds Direxion offers?
I think about our lineup as two separate businesses. The first is targeted at tactical traders, which is where our primary heritage is, and what the firm was built from since its inception over a decade ago. We also have a smaller business, but one that’s expanding in number of products, that’s focused on buy-and-hold investors. Within that group, there are great similarities to traditional ETF providers; meaning, some funds could be considered thematic, some funds could be considered more for port-folio construction, and the like.
What’s Direxion’s process to launch a new fund? How do you decide what launches?
When it comes to leveraged and inverse, the process is relatively straightforward. We identify areas in the market that may already have an existing ecosystem; meaning, there’s already an ETF in the market that has assets. We don’t have a magic number, but [we make sure] there are assets behind it, there’s trading volume, there are tight bid/ask spreads, it’s quoted in the media—that there’s an ecosystem.
That will spit out a list of many funds, because that’s purely a quantitative screen. But from there, we look to see if the fund or the underlying asset class itself has some volatility; so that a trader could take advantage of upside and downside. Then the process becomes more like traditional competitive analysis. Do we have an ETF already, or is there one from a competitor that’s remarkably similar?
Some of our most recent launches, [the Direxion Daily Dow Jones Internet Bull 3X Shares] WEBL and [the Direxion Daily Dow Jones Internet Bear 3X Shares] WEBS, are built off of the Dow Jones Internet Composite Index, a longstanding index. [The First Trust Dow Jones Internet Index Fund] FDN, the biggest product there, has been longstanding. But all of that doesn’t guarantee success for the product. In many cases, it’s about what the basket looks like, and the behavior of that particular product and asset class, to make for a potentially good leveraged or inverse product.
How is it different for a thematic ETF or a smart beta strategy?
We’ve embarked on a path to diversify the business, but we think about products that can play to our strengths; meaning, we can develop something and manage something that’s going to be unique in the marketplace. We have some incredible skill at managing complicated portfolios, and we believe we can take some of that expertise and apply it in different ways.
But when it comes to looking for new products to launch, we know we need to build something differently. For example, in the case of our Relative Weight products, which are structured as 150/50 funds, the underlying exposures are straightforward; it’s Russell 1000 Value, Russell 1000 Growth, Russell 1000, Russell 2000, etc. We’re just taking the long-only approach that investors have historically used, but owning additional long sides and additional short sides to it.
That’s an example where we’re taking a straightforward classic portfolio construction tool, but providing amplification for an investor who might have a view that over six to 12 months they can outperform value.
With the Portfolio Plus family, there’s a lot of evidence that suggests that if you’re willing to take on a modest amount of leverage—which does come with a modest increase in volatility—and you’re looking to have long-term positions in asset classes, whether it’s U.S. equities or emerging market equities, a small amount of leverage can deliver better total returns.
What do you consider your most overlooked product?
While recently launched, I believe the Direxion Flight To Safety Strategy ETF (FLYT) has a significant amount of benefits for investors. Part of it is because we’re seeing significant market volatility, but the real reason I like this strategy is not just because it has drawdown protection—in the form of gold bullion, long-term Treasuries, and large cap utilities—but because most hedging strategies are costly from an expense ratio perspective, and they’re costly because they can be a drag on returns.
I’d own this type of ETF because it’s my insurance policy, but when you’re in the 2017s and 2018s and 2019s market environments, there’s a lot of line-item risk if you’re an advisor or individual investor to see a drag in performance. FLYT isn’t intended to be up in all market environments. But because you’re combining three assets that are uncorrelated with one another, you don’t have a long-term drag on performance. You can get capital appreciation. You can get positive returns from gold and positive returns from long-term bonds.
It’s something that can be an all-weather type of allocation, and it’s there as your ballast when you need it. And two of the three assets actually pay you income. In this market environment, it’s not a lot, but there’s not a lot of diversification or hedging strategies that actually do pay you an income stream. FLYT right now is the fund that I think more investors should be keeping an eye on.
What do you see as the strengths of Direxion’s ETF team?
I’ve spent most of my career at State Street Global Advisors, and I’ve spent some time at Oppenheimer Funds. Direxion, in the grand scheme of things, from an asset management perspective, isn’t a boutique, but it’s not tiny either. We have a modest number of people, under 40 in all.
Our real skill set comes in portfolio construction and risk management. Managing leveraged and inverse funds, and managing them well, and making decisions like we did recently to lower leverage points [for a number of funds], comes with years of experience and significant systems built up to effectively manage those funds.
For a larger view, please click on the image above.
We deliver on investor expectations. Many firms can say that—large firms with index heritage and the like. In our particular case, using our proprietary systems and leveraging third-party systems, we’ve built up a really sound skill set and DNA in shorting stocks, in accessing derivatives, and in managing portfolios internationally and in the U.S., across equities and fixed income. That’s one of the reasons I was attracted to join the firm to begin with, and the ability to bring a new product lens to that base was really exciting.