Direxion Ratchets Down Geared ETFs

March 25, 2020

Direxion ETFs has announced that it will be changing the magnitude of leverage offered by 10 of its funds, and closing eight ETFs with varying degrees of leverage.

As of May 19, the following ETFs will change their names as follows:

 

Reasons

According to David Mazza, Direxion’s head of product, the one thing all of the affected ETFs have in common—beyond the fact that they currently offer 3x exposure to their underlying indexes—is that their performance is closely tied to that of commodity markets. After the adjustments are made, the funds will offer 2x exposure to their underlying indexes.

“With the increase in volatility, it really comes down to the ability to cost effectively [provide] the amplification of exposure that’s required. We believe it’s prudent in the funds that we identified to move the leverage ratio from 3x to 2x,” Mazza noted.

“We continue to have a strong relationship with the counterparties that we work with, and believe that in the majority of cases, the funds where we currently offer 3x can continue to deliver the exposure that investors are seeking,” he added.

As the magnitude of leveraged or inverse exposure increases, “the impact of negative compounding can increase and the challenges that could occur to effectively put on any exposure can be amplified,” Mazza noted.

It should be noted that Direxion further announced on March 24 and 25 that, as a result of “significant market disruption and volatility,” NUGT and JNUG were providing reduced exposure to their underlying indexes. On March 24, the exposure had been reduced to 260% for NUGT and 240% for JNUG, while yesterday, both funds were offering approximately 220% exposure to their underlying indexes rather than 300% exposure.

Both press releases indicated that these were one-day levels, so for now, the exposures offered by these two ETFs at least are moving targets.

Closures

The issuer is also shuttering a total of eight funds by the end of this week. The list of Direxion ETFs that are set to close as of March 27 includes the following:

Mazza notes that all of the funds have low amounts of assets under management (AUM) and that six of the funds closing offer inverse “Bear” exposure.

“What you tend to see is that bear funds tend to have very episodic interest, meaning when people want to have a direct hedge or want to speculate on the potential for an asset to go down,” he said. “That’s when the bear funds tend to do well, whereas the bull funds will see healthy interest in bull markets, bear markets, sideways markets, etc.”

Direxion currently offers 97 ETFs and has nearly $8 billion in AUM.

Contact Heather Bell at [email protected]

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