Daily ETF Watch: Dividend Funds Planned

Direxion has put three funds into registration that track equal-weighted indexes from research firm Value Line Publishing that are based on rankings systems developed by the index provider.

High-Dividend Funds

Two of the funds rely on Value Line’s Safety, Timeliness and Financial Strength rankings, with the smaller-cap fund also incorporating the Performance ranking when necessary. Value Line measures “Safety” in terms of volatility, while Financial Strength is based on reviews of company balance sheets and income statements, looking at things like debt ratios, income and sales growth.

The Timeliness ranking involves earnings growth—both recent and in relation to the other companies in Value Line’s 1,700 stock universe—the most recent quarter’s performance and recent performance relative to market expectations.

When there is not enough data for a Timeliness ranking to be calculated—usually for a small- or midcap stock—Value Line instead relies on its Performance ranking, which is based on a stock’s relative performance versus other stocks in its universe receiving a Performance ranking, as well as other earnings-related data.

The Direxion Value Line Large and Mid-Cap High Dividend ETF and Direxion Value Line Small and Mid-Cap High Dividend ETF both will be tied to indexes that track 50 components paying above-average dividends.

It is not made explicitly clear in the prospectus how components will be selected based on these rankings. Although there are a ton of dividend-focused ETFs, they are usually pretty straightforward—ranking their potential components by various dividend metrics and then selecting them in a quantitative manner. Things like volatility and earnings growth are not usually a part of the process. The added layers of complexity and the equal-weighting give these funds a decidedly “smart beta” tilt.

A Conservative ETF

Meanwhile, the Direxion Value Line Conservative Equity ETF’s index relies mainly on the Safety ranking to select its components.

The Safety ranking is very much focused on volatility levels, so the fund will join the ever-growing pantheon of low-volatility ETFs, where it will likely face some stiff competition. For example, the factor-based iShares MSCI USA Minimum Volatility ETF (USMV | A-64) has roughly $3.6 billion in assets under management. Moreover, it comes with an expense ratio of 0.15 percent, while the Direxion fund’s stated expense ratio is nearly four times that. Finally, its minimum-variance approach is fairly easy to understand.

The proposed Direxion funds’ indexes are all reviewed weekly in terms of rankings, with companies being replaced if they experience a significant slide, the prospectus said. Regular reviews take place on a quarterly basis as well, but weights are only rebalanced annually.

All three ETFs are expected to have expense ratios of 0.58 percent, or $58 per $10,000 invested, according to the prospectus, and they will list on the NYSE Arca. However, no tickers were provided in the initial filing.