Direxion Launches 3 Low-Volatility ETFs

January 11, 2012

Direxion serves up three new ETFs designed to help mitigate risk in volatile markets.

Direxion, the Newton, Mass.-based firm known for its leveraged and inverse funds, launched three new low volatility funds today that use a rules-based approach to determine a balance between equity exposure and fixed-income securities, including U.S. Treasury bills.

The three funds and their respective tickers are:

  • Direxion S&P 1500 RC Volatility Response Shares ETF (NYSEArca: VSPR)
  • Direxion S&P 500 RC Volatility Response Shares ETF (NYSEArca: VSPY)
  • Direxion S&P Latin America 40 RC Volatility Response Shares ETF (NYSEArca: VLAT)

 

All three funds have a total annual expense ratio of 0.69 percent, but the funds come with a 0.24 percent fee waiver that will be in place until April 1, 2013. That means they each have a net expense ratio of 0.45 percent.

Direxion’s funds are coming online at a propitious time. With a volatile stock market and veteran hedge funds and money managers taking record losses, “smart beta” products that utilize low volatility strategies have suddenly become all the rage, with several major ETF sponsors vying for a piece of the growing market.

The most successful at gathering assets has been the Invesco PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV), which has pulled in $1 billion since its launch in May. In addition to SPLV, the new Direxion funds will also face competition from low-volatility ETFs launched last year by Russell and iShares.

The three funds that Direxion launched today are part of a family of seven smart beta products that the company registered with the Securities and Exchange Commission last spring, marking a major move by the company to expand its business beyond leveraged and inverse funds.

Each of the three new funds has a target volatility level for its corresponding index. When volatility levels increase above certain established volatility targets, the funds readjust their allocations of stocks and bonds. To meet their volatility targets, the three funds could rebalance on a daily basis, according to their prospectuses.

“Periods of higher than average market volatility tend to coincide, with potentially adverse equity markets, while periods of below average market volatility tend to represent a more stable environment and a greater likelihood of favorable equity market conditions,” Ed Egilinsky, managing director of alternative investments at Direxion, said in a press release.

“By tracking indices that use volatility to dictate overall equity exposure, these funds serve as a means for investors to gain exposure to equities, while seeking to help protect their portfolios,” Egilinsky added.

Although the volatility targets are not referenced in the prospectuses for the funds, the filings state that based on historic volatility of the respective indexes, the percentage exposure to the stock components is expected to range between 28 percent and 150 percent, and at no point will they exceed 150 percent.

In this regard, the funds generally will invest in financial instruments when the stock components exceed 100 percent. Exposure to the cash components for all three funds is expected to range between zero percent and 72 percent.

According to Direxion spokesman Andy O’Rourke, because these funds track S&P Risk Control Indexes, they have the potential to perform better in some instances than their underlying indexes.

“These are buy-and-hold strategies,” O’Rourke said in a telephone interview. “They try to identify the times when you want to go all in or get a little extra exposure and, on the reverse side, identify times where it is most prudent to pull back a bit. If it gets that right, it is going to ideally outperform the underlying index—but the funds are really focused on trying to mitigate risk.”

 

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