Looking for Direxion: the balance between investment strategies and trading solutions

 Pablo Conde, 10 July 2015

Looking for Direxion: the balance between investment strategies and trading solutions

Launched as Potomac Funds in 1997 and rebranded Direxion Investments in 2014, the US-based specialist provider of leverage exchange-traded products has focused its offering on non-traditional investments to accommodate various market cycles. SRP spoke to Sylvia Jablonski (pictured), managing director, capital markets, institutional strategist at Direxion, about the increasing demand for ETFs, the use of leveraged and inverse structures by strategic and tactical investors, and their suitability for retail investors.

How do you differentiate in the leverage/short ETF market?
Direxion’s focus is on products seeking specific outcomes, such as broader diversification, dampened volatility and income or alpha generation. Our leverage ETF range is aimed at providing efficient access to non-correlated asset classes and strategies as well as flexibility to position portfolios opportunistically for near- and long-term market trends.

As a product provider, we seek to complement core investment strategies, not replace them. We offer a wide range of index-based products that offer directional options, magnified exposure and long-term rules-based strategies. Our suite of products help traders and investors stay nimble in the short term and pursue strategies for the long-term.

Why do you favour leverage and inverse ETFs over other product types?
Leverage and inverse ETFs are liquid, cost-effective instruments for accessing sophisticated strategies. Our funds are aimed at investors seeking opportunities in all market conditions and are built to challenge old standards. For short-term traders, our leveraged and inverse ETFs provide opportunities to magnify short-term views with daily 3x leverage, deploy bull and bear structures to cover both sides of a trade and allow efficient trading through rapidly changing markets.

We have seen increasing demand for exposure to the low volatility trending market and also to markets and sectors via short term bull and bear skews. These traders are seeking to capitalise on trends within sectors and countries and leveraged and inverse ETFs provide the chance to magnify returns and exercise a market view.

Are there any suitability issues around leverage and inverse ETFs?
These products are not meant to be bought and held, and are aimed at sophisticated investors. Leverage ETFs are meant for tactical and opportunistic trading. We include ‘daily’ in the ETF name on purpose so that there is no doubt that these products will be exposed to daily values.

What is an appropriate leverage factor for traders?
The leverage we offer on our products is a differentiating factor for us and the majority of our products have 3x leverage. That level of leverage would provide value to the right trader that understands the risks and wants to use this kind of leverage to generate beta momentum and compound gains in the short term. We have used other leverage and inverse factors, but we feel the 3x is within the limits that our clients would feel comfortable. We do use different leverage levels on the upside and downside. This can go from a low 1.5x leverage, which can be used to hedge or boost some portfolios, but we also offer higher leverage for those traders seeking more ad hoc tactical trading.

We’ve seen leverage factors of up to 18x in some countries (Nordics) in exchange-traded notes. Do you think the US market will ever see that kind of leverage?
I don’t think we will ever see an 18x leverage on an ETF wrapper in the US market. There are other wrappers, such as ETNs, which could be more appropriate to trade with higher leverage, but we think a 3x factor is the right leverage based on the historical volatility of the underlyings we are using. The SEC has sanctioned the 3x leverage issuance (Direxion and Proshares), as long as disclosure requirements are met.

Jablonski joined Direxion in 2010 from Societe Generale, where she was a vice-president, equity derivatives, delta one sales trader, working in a sales and product development capacity within the French bank’s global equity derivatives division, focusing on the asset management, hedge fund, and pension and endowment client areas. Before SG, Jablonski worked at Deutsche Bank Securities in various roles, including strategy, product development, and relationship management within the bank’s global equity derivatives/total return swaps division.

Note: Leveraged ETFs are allowed by the SEC, but the regulatory agency issued a joint investor alert with the US Financial Regulatory Agency (Finra) in the summer of 2009 warning that leveraged and inverse ETFs pose extra risks for buy-and-hold investors, as they are designed to achieve their performance objectives on a daily basis rather than over the long term. Earlier that year, Finra issued Regulatory Notice 09-31, which reminded firms of their sales practice obligations regarding leveraged and inverse ETFs.

Related stories:
US watchdog targets ETP ‘complexity’ and sales
Finra bans representative for mis-selling leveraged ETFs
Ameriprise sued over leveraged/inverse ETF sales
Finra fines former ML broker for inverse ETF sales
Leveraged ETFs could ‘blow up’ whole industry, BlackRock chief
Finra fines broker-dealer for leverage/inverse ETF sales shortcomings

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