[This ETF Industry Perspective is sponsored by Portfolio+ ETFs.]
How Volatility Affects Portfolio+ ETFs
Portfolio+ ETFs are a suite of exchange-traded funds that add 25% more daily exposure to popular broad-based indexes. By applying a modest amount of leverage (1.25X), these ETFs allow investors to obtain $1.25 worth of daily exposure to their benchmark index for every $1.00 invested, with little change to a portfolio’s risk profile.
The Portfolio+ ETFs seek investment results that are 125% of the return of a benchmark index for a single day. These ETFs should not be expected to provide 1.25 times the return of the benchmark’s cumulative return for periods greater than a day. To achieve their investment objectives, the Portfolio+ ETFs must rebalance their exposure ratio on a daily basis, which means the returns of these ETFs are the product of a series of daily returns over time.
This product of a series of daily returns over time is known as “compounding.” Compounding will cause an ETF’s performance to vary, or “drift,” from that of the performance of its benchmark index.
Why Does It Matter?
Although compounding can help performance over time, it has a negative effect during periods of high volatility. The following example illustrates that increased volatility has a negative effect over periods of elevated volatility.
The S&P 500® Index experienced a spike in volatility over the period 1/14/2016 to 2/12/2016. The benchmark index declined 2.77% over the holding period. The Portfolio+ S&P 500® ETF (PPLC) declined.
3.55%. That’s 0.06 percentage points less than the 125% of the benchmark’s return. It’s important to understand why this effect occurs, but also important to recognize that, even in this period of high volatility, the variance is not very substantial.
Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized. For the most recent month-end performance, please visit the funds’ website at portfolioplusetfs.com.
Investing in a Portfolio+ ETF may be more volatile than investing in broadly diversified funds. The volatility of an index may affect a Portfolio+ ETF’s return as much as, or more than, the return of the index. As a result, the Portfolio+ ETFs may not behave as expected. The Portfolio+ ETFs are intended to be used by investors who intend to monitor their portfolios.
The Long Run: When Less May Be More
Compounding works both ways: Sustained market trends and periods of low volatility can result in positive effects on returns.
Over a longer time frame, the same S&P 500® Index experienced much less overall volatility than in the previous shorter time period.
PPLC’s benchmark index gained 48.53% over the holding period. PPLC gained 61.88%. That’s 13.35 percentage points more than 125% of the benchmark’s return.
Past performance does not guarantee future results.
Potential for enhanced returns with minimal negative compounding
Unlike highly leveraged ETFs employed by short-term traders, Portfolio+ ETFs are intended to be used for longer-term investors. Portfolio+ ETFs help you seek enhanced daily returns with minimal negative compounding, allowing investors to manage them easily within longer-term asset allocation strategies.
During periods of low volatility in rising markets, the ETFs provide added strength that can overcome the short-term impact of negative compounding.
For a larger view, please click on the image above.
The graph above shows total cumulative returns and volatility of the S&P 500 since 12/31/1985. The straight diagonal line in the chart represents a trend line. The returns scale starts at 0%.
For a larger view, please click on the image above.
The performance data quoted represents past performance. Past performance does not guarantee future results. Short-term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. Because of ongoing market volatility, fund performance may be subject to substantial short-term changes. For additional information, see the fund’s prospectus.
*The Net Expense Ratio includes management fees, other operating expenses and Acquired Fund Fees and Expenses. If Acquired Fund Fees and Expenses were excluded, the Net Expense Ratio would be 0.25%, respectively. The Fund’s Adviser, Direxion Advisors, LLC (“Direxion”) has entered into an Operating Expense Limitation Agreement with the Fund, under which Direxion has contractually agreed to cap all or a portion of its management fee and/ or reimburse the Fund for Other Expenses through September 1, 2019, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed a % of the Fund’s daily net assets (excluding, as applicable, among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses). If these expenses were included, the expense ratio would be higher.
An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Portfolio+ ETFs. To obtain a Fund’s prospectus and summary prospectus, call 833-547-4417 or visit our website at www.portfolioplusetfs.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.
Shares of the Portfolio+ ETFs are bought and sold at market price (not NAV) and are not individually redeemed from a Fund. Brokerage commissions will reduce returns. Market Price returns are based upon the midpoint of the bid/ask spread at 4:00 p.m. ET (when NAV is normally calculated) and do not represent the returns you would receive if you traded shares at other times. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Some performance results reflect expense reimbursements or recoupments and fee waivers in effect during certain periods shown. Absent these reimbursements or recoupments and fee waivers, results would have been less favorable.
Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is nondiversified and includes risks associated with the Fund concentrating its investments in a particular industry, sector, or geographic region, which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Daily Index Correlation/Tracking Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk, risks specific to investment in the securities of the Consumer Discretionary and Industrials Sectors, and in small and/or mid-capitalization securities. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.
The S&P 500® Index is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Direxion Advisors, LLC (“Direxion”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Direxion. Direxion’s ETFs are not sponsored, endorsed, sold, or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s), nor do they have any liability for any errors, omissions, or interruptions of the S&P Small Cap 600® Index.
Distributor for Portfolio+ ETFs: Foreside Fund Services, LLC.