Sizing Up Long/Short ETF Tools

September 24, 2019

Dave MazzaDirexion Funds, sponsored by Rafferty Asset Management, is well-known for its ETF tools for tactical traders, with a long lineup of leveraged and inverse funds the day-trading crowd has come to rely on.

The firm boasts $13 billion in 88 U.S.-listed ETF assets today.

However, earlier this year, Direxion launched a family of long/short ETFs built like no other—capturing 150 (long)/50 (short) exposures of entire sectors, factors and regions, with the goal of expanding its reach to a broader set of investors who think more long term than day traders. 

The lineup (below) is highly intuitive from a design perspective. Offered in pairs, these ETF portfolios go long defensive sectors, short cyclicals, and vice versa; or long developed equities, short emerging markets. There’s a long-value, short-growth equities ETF, and an ETF that takes the flip side of that trade. In short, these ETFs essentially offer leveraged (1.5x) exposure to a segment or theme, and short (-0.5x) exposure to another, capturing the relative performance between the two.

The pairs of ETFs launched earlier this year include:

Each of these ETFs has about $29 million in assets, and cost 0.46% in expense ratio (ER).

These ETFs have $18 million and $14 million in assets, respectively, and cost 0.45% in ER.

Each of these ETFs has about $16 million in assets, and cost 0.46% in ER.

RWDE has $15 million in assets and costs 0.52% in ER; RWED has $13 million and costs 0.58% in ER.

RWUI has $15 million in assets and costs 0.46% in ER; RWIU has $14 million and costs 0.55% in ER.

We recently spoke with David Mazza, head of product for Direxion, to talk about what these ETFs bring to the table, and how investors are using them. Here’s what he had to say:

ETF.com: What drove Direxion to break into new territory and launch this family of long/short products? What’s the big picture?

David Mazza: These strategies are developed in an intuitive way, really centered on the way many investors make major decisions when building the equity part of a portfolio. At its core, investors have an opinion on the U.S. versus international stocks, or emerging market over developed market stocks, or value over growth.

However, the primary way they’ve historically expressed those views in portfolios is by over- or underweighting one of those particular pairs. The challenge is that you’re actually only expressing part of that view, because you're never able to actually fully underweight a particular position. That's where the idea behind the relative weight strategy came about—it’s a way to be more capital efficient in your exposure.

You gain 150% on the long side, plus 50% on the short side. If your view is correct, you would have the ability to outperform that traditional long-only approach.

ETF.com: In this kind of approach, the direction matters, but also the relative performance between the two segments, because a 150/50 would magnify that relative performance, right? Take RWDE, for example. Since inception, the fund—long-developed, short-emerging—has actually outperformed both the iShares Core MSCI EAFE ETF (IEFA) and the iShares Core MSCI Emerging Markets ETF (IEMG).

 

Chart courtesy of StockCharts.com

 

Mazza: Yes. If your view is incorrect, by having amplified exposure, you would underperform. But we offer both sides of the pairs. We may have an opinion on what particular area of the markets may do best, but we want to give people the tools so they can implement both sides of the view.

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