Direxion Leverages India

March 20, 2008

Fund firm adds India to its lineup of leveraged index mutual funds covering emerging markets.

Direxion Funds has expanded its offering of leveraged mutual funds tracking emerging markets this week with the launch of its India Bull 2X Fund (DXILX), which attempts to capture 200% of the daily price performance of the MSCI India Total Return Index.

That's the same index that underlies the iPath MSCI India Index exchange-traded note (NYSE Arca: INP). Barclays actually suspended operations of INP last year for several trading days due to the imposition of additional capital controls by regulatory authorities in India that limited foreign investment in publicly traded companies. As a result of the added restrictions on foreign investment, the ETN exhibited profound tracking error in comparison to its underlying index. Barclays has since reinstated most operations to permit the lending of notes and sales from inventory, but it still is not allowing the creation of new units.

That's interesting, of course, because the new Direxion fund invests in INP and derivatives linked to it, as well as other securities, according to Daniel O'Neill, Direxion's chief executive officer and chief investment officer. But it tries to take premiums and discounts into account.

"We monitor the net asset value of INP relative to the traded price and use other instruments available to us through time if we see substantial premiums or discounts developing," he said. He added that Direxion originally had held off launching DXILX out of concern about INP's potential for developing a premium, but that the recent launches of two new India ETFs by WisdomTree (EPI) and PowerShares (PIN) and the existence of two closed-end funds, IIF and IFN, mean there should be enough liquidity and enough ways to gain exposure to the market.

"We monitor the other instruments as well for liquidity and correlation and will use them as necessary to try to ensure tracking," O'Neill said.

According to the prospectus, investor class shares of DXILX charge a net management fee of 1.50%. The prospectus also indicates that the complementary India Bear 2X Fund, which will seek 200% of the inverse of the daily performance of the MSCI India Total Return Index, could charge an investor class fee as high as 6.14%. We certainly hope it comes in lower than that...

Direxion has 23 leveraged and inverse index mutual funds currently trading; the funds are marketed mainly to financial advisors. The firm already has several emerging markets funds-including bull and bear funds tracking China, Latin America and emerging markets as a whole.

View the prospectus for DXILX here.

Read our story on the launch of the WisdomTree India Earnings ETF (NYSE Arca: EPI) here.

Read our story on the launch of the PowerShares India Portfolio (NYSE Arca: PIN) here.

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