Andy O'Rourke says the nuances of intraday trading and the impact of compounding in leveraged ETFs need to be fully understood.
Just four ETF companies took in more net new cash in November than DirexionShares. Its Large Cap Bull 3X Shares have been among the most heavily traded NYSE Arca stocks lately. IU.com's Eric Rosenbaum recently spoke with Direxion Funds' marketing director Andy O'Rourke about the rapid rise to ETF prominence and how the fund company can keep the momentum up.
IU.com: Is the company surprised by how quickly the market embraced the 3X approach?
O'Rourke: As of Dec. 12, we surpassed $800 million in assets. We were at least somewhat surprised that the response has been so positive. We hope that demand stays where it is, and we have every reason to believe it will, but we won't consider the ETFs an absolute success until their longevity is proven.
IU.com: Were there a lot of naysayers, predating the launch, who said with 2X leverage products in the market, enough was enough?
O'Rourke: The big question was about existing products out there offering leverage at 2-to-1, and to some people, that seemed plenty. The question asked was, would the market see these shares as that different from 2X leverage ETFs, or would investors be scared away and feel that the shares hit the point of too much leverage? ProShares has had a tremendous amount of success and will continue to. We never thought of our entry in terms of cannibalizing anyone else's business, either.
IU.com: Some advisors make the case that if you don't have advanced computer systems trading in fractions of seconds, as an average investor, you should not go near funds like these. Do you agree with that perspective, or can you make a case that 3X leverage ETFs can be used by average investors?
O'Rourke: Should an individual investor be buying these funds just to try them out? No, definitely not, and we are the first to be vocal about that. The nuances of intraday movement in these ETFs and the impact of compounding over longer time periods are phenomena of leveraged investing that have to be understood. These funds have daily objectives, and they have been meeting those, but if you invest over a longer period of time, your objective versus that daily objective can get seriously out of whack. We understand that there are investors in these ETFs who may not have full understanding, so we have really been communicating via email campaigns in the early days.
IU.com: Can you provide an example of the compounding issue that already occurred with the ETFs and that you have been proactively communicating to investors?
O'Rourke: This is less relevant to those trading intraday, but a few weeks after the ETFs launched, we realized there were substantial excesses in most of the funds, especially on the bear side. We began an email campaign to let investors know about the activity and how the ETFs returns were deviating from the indexes. From inception to two weeks later, there were excesses of 76% in the case of the Financial Bear 3X Shares. That's a wise time for investors who know what they are doing to take earnings off the table and not "let it ride." In fact, when we looked again two weeks later, almost all that excess return was gone. Investors need to understand these fluctuations can and do happen with leverage ETFs. For investors to align their goals with 3X beta for periods of greater than one day, they have to be regularly thinking in terms of reallocating.
IU.com: What types of investors have been the primary users of the DirexionShares so far?
O'Rourke: Certainly, institutional traders and hedge fund managers have welcomed our funds, as have active investors in the advisor community. For institutions and hedge funds, it is partially because leverage has become more difficult to obtain. These ETFs are a simplified way to get leverage without a margin account and no margin calls. Institutional traders who understand how these ETFs work and hedge fund managers are used to trading products with much more leverage than exist in our ETFs.