Direxion Offering Three Times The Leverage

December 16, 2008


IU.com: How much of the early success has been due to the extreme volatility and intraday opportunities, and how will the company keep up momentum when the markets become more normal?

O'Rourke: There have been successful intraday trading strategies, but also investors maintaining assets overnight. It is a valid point though, that the markets are so volatile now that our 3X leverage ETFs have provided a mechanism for day traders to profit from large intraday swings.

As markets normalize, investors and traders may consider using the ETFs in the more traditional way that they have used our existing mutual funds. With markets as volatile as they are now, it is difficult to let a hedged position last for longer than a very short period of time. We want these ETFs to be thought of as portfolio tools rather than day-trading vehicles. The ETFs have applications in hedging an overall portfolio, and in providing leverage for portable alpha and long-short relative value trades. Active investors recognize how to use these leveraged ETFs to free up capital and diversify further, and for longevity, it will be important for them to return to using ETFs with more of those strategies.

IU.com: How do the open-end mutual funds using similar strategies fit into your overall growth strategy?

O'Rourke: The ETFs will grow but the mutual fund space will not go away completely, especially when you look at issues like the retirement market and the relative infancy of ETFs there. Also, there are particular long/short strategies we will continue to innovate with on the traditional fund side of the business, especially in the area of alternative assets, like the commodity long/short fund we launched during the summer. We have just filed for a similar long/short financials fund. We raised more assets in our commodities fund tracking the S&P Commodity Trends Indicator Index than ELEMENTS ETNs raised in its exchange-traded note tracking the same index.

IU.com: Direxion Funds is in the process of liquidating seven of its traditional funds. Is that related to the ETF success?

O'Rourke: Our ongoing liquidation of seven funds from the traditional side of the business is partially related to the ETF launch. At a basic level, there is a crossover point in terms of profitability with leverage and inverse funds where the trading costs in small funds can outweigh profits. At a macro level, we are pruning the traditional lineup of funds because now that we have ETFs, we want to be as nimble overall as possible in terms of profits. We don't want any deadweight, and these were all small funds.  

Also, a few of the liquidated funds were targeting Japan and India, and we plan on having a greater focus on international in our ETF lineup. We have registered for bull and bear India ETFs, and also bull and bear China ETFs. While those traditional funds were small, we are optimistic about country-specific portfolios in the ETF space. The viability will come from actively being able to trade both sides. I think ProShares has more than 50% of their assets in international.

IU.com: DirexionShares has a slew of international ETFs filed, as well as sector ETFs. Will the international ETFs be the next to launch?

O'Rourke: Yes, the 3X international index ETFs will be next to launch. I can't say which ones, but before the end of the year there will be a handful more on the international side. Everything we offer in ETFs is domestic right now, and since we now have a footprint in domestic, we want to see how well our ETFs trade on international indexes.

IU.com: You've upped the ante to 3X leverage. Some advisors have told us that their computer systems can trade effectively at 5X leverage. How high can it go? Is 4X, 5X leverage on the horizon?

O'Rourke: We have no plans to go there at any point. To some degree, you get to a point where market volatility makes pushing the envelope further with leverage a mistake. In any given day if an index is down 33%, someone investing money in one of our funds would be down to zero. That's not terribly realistic with market structure like circuit breakers, but it's plausible. So if you reached the point where the market only needed to drop 20-25% to take an investor's assets to zero, then that might be too much.



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