Direxion trims leverage on five of its equities ETFs that seek to manage volatility.
Direxion, the Newton, Mass.-based firm known for its leveraged and inverse funds, filed regulatory paperwork this week outlining plans to cut leverage on three existing volatility-managing funds and two other similar ETFs that aren’t live yet. The moves were made to sharpen focus on the funds’ risk-mitigation attributes.
Direxion’s filing to change the investment strategies on its volatility-calibrated funds also trigged a relatively new SEC requirement that the ETF company update expense ratios on the three existing volatility funds. Those changes are detailed below.
Under the proposed strategy changes, which should take effect June 15, four of the funds’ potential allocation to stocks will drop to a range of 10 to 100 percent from a current range of 28 to 150 percent, the filing said. That means the potential cash portion will shift range from 0 to 90 percent.
Those four funds, the first three of which Direxion launched in January, are as follows:
- Direxion S&P 1500 RC Volatility Response Shares (NYSEArca: VSPR)
- Direxion S&P 500 RC Volatility Response Shares (NYSEArca: VSPY)
- Direxion S&P Latin America 40 RC Volatility Response Shares (NYSEArca: VLAT)
- Direxion S&P 600 RC Volatility Response Shares, which remains in registration and doesn’t yet have a ticker.
The way the funds work is that the less the equities allocation, the greater the cash component, and vice versa. The cash allocation rises in volatile markets, while the equities allocation rises when markets are more stable.
“We are no longer going above 100 percent when the volatility levels go below the target, because the funds are more meant to be focused on risk mitigation and downside protection,” Andy O’Rourke, Direxion’s director of marketing, said in a telephone interview.
“We think this is a purer way to focus on that goal, and we are less interested in finding certain periods of time when you can you overexpose the funds to equities to receive gain—it’s not really an alpha-seeking strategy,” he added.
The fifth fund, the Direxion Nasdaq Volatility Response Shares (NYSEArca: QVOL), is also still in the regulatory pipeline and will shift its allocation scheme a bit differently from the other four ETFs.
Stock allocations on the Nasdaq 100-focused ETF will drop to a range of 17 to 100 percent, while cash exposure will range between 0 and 83 percent, the filing said.