Direxion CEO discusses the proper way investors should view and use inverse and leveraged funds.
“Structure Matters,” by Dan Weiskopf, portfolio manager of Access ETF Solutions, examines issues about ETF structures in a series of interviews with ETF portfolio managers, index developers and other people who affect the structure of ETFs. The goal of the series is to highlight the different operating roles that individuals have that make the ETF structure work well for the investor.
Our series would be incomplete if it did not address the issue of leveraged and inverse ETFs. In this segment, we interview Daniel O’Neill, chief executive officer of Direxion Shares. Direxion today has about $7 billion in AUM, and its leveraged products were launched late in 2008.
Dan Weiskopf: You have two types of ETFs at Direxion: tactical ETFs and strategic ETFs. What do you look in an index provider when you’re trying to launch an ETF?
Dan O’Neill: Given the differences between these products, I have two different answers to that question.
For our levered and inverse products, we generally look at the one-beta market to see if the liquidity and asset size is substantial enough to support a levered product. In that part of the business, it’s the products rather than the indexes that are most important to us.
In the strategic space, our goal is to offer an ETF that has alpha over similar ETFs. We have four ETFs in this space, and we plan to grow this business.
Weiskopf: When we first met back in 2009, you made it clear that people interested in levered and inverse ETFs should take the time to understand how the products work, and you referenced your website as a repository of important educational materials. What areas of your website should people really be looking at today?
O’Neill: My basic advice is still the same—understand a product before you trade it. Levered and inverse products are different from strategic products. No. 1, they have leverage, which increases risk. The “bear” products also move opposite the indexes, which is different than traditional investment products.
Also, our tactical ETFs seek daily investment results—they are daily-beta products—which means their returns through time depend on the index path as much as the return for the holding period. We knew it was important that users, investors and traders, understood these different implications.
The daily-beta products are on a daily basis seeking levered returns, and that is not the same thing as seeking levered returns for a much longer period of time. People should understand the impact that volatility has on the return for our daily products through time.
Our website offers a number of white papers and tools that show the effects of compounding. We have what we call Direxion Shares Online University, which will test your knowledge of how the products work. It’s pretty comprehensive and self-paced.
We also have a tool on our website that shows the realized volatility for indexes that we use as benchmarks. Given the importance of volatility in these strategies, we think anyone involved in trading leveraged ETFs should take a look at this tool.