Direxion, the Newton, Mass.-based firm known for its leveraged and inverse funds, filed regulatory paperwork this week outlining plans to cut leverage on three existing volatility-managing funds and two other similar ETFs that aren’t live yet. The moves were made to sharpen focus on the funds’ risk-mitigation attributes.
Direxion’s filing to change the investment strategies on its volatility-calibrated funds also trigged a relatively new SEC requirement that the ETF company update expense ratios on the three existing volatility funds. Those changes are detailed below.
Under the proposed strategy changes, which should take effect June 15, four of the funds’ potential allocation to stocks will drop to a range of 10 to 100 percent from a current range of 28 to 150 percent, the filing said. That means the potential cash portion will shift range from 0 to 90 percent.
Those four funds, the first three of which Direxion launched in January, are as follows:
- Direxion S'P 1500 RC Volatility Response Shares (VSPR - News)
- Direxion S'P 500 RC Volatility Response Shares (VSPY - News)
- Direxion S'P Latin America 40 RC Volatility Response Shares (VLAT - News)
- Direxion S'P 600 RC Volatility Response Shares, which remains in registration and doesn’t yet have a ticker.
The way the funds work is that the less the equities allocation, the greater the cash component, and vice versa. The cash allocation rises in volatile markets, while the equities allocation rises when markets are more stable.
“We are no longer going above 100 percent when the volatility levels go below the target, because the funds are more meant to be focused on risk mitigation and downside protection,” Andy O’Rourke, Direxion’s director of marketing, said in a telephone interview.
“We think this is a purer way to focus on that goal, and we are less interested in finding certain periods of time when you can you overexpose the funds to equities to receive gain—it’s not really an alpha-seeking strategy,” he added.
The fifth fund, the Direxion Nasdaq Volatility Response Shares (NYSEArca:QVOL), is also still in the regulatory pipeline and will shift its allocation scheme a bit differently from the other four ETFs.
Stock allocations on the Nasdaq 100-focused ETF will drop to a range of 17 to 100 percent, while cash exposure will range between 0 and 83 percent, the filing said.
Shift In How Costs Are Expressed
As noted, Direxion also changed the way it’s expressing the funds’ costs.
The company is now disclosing so-called acquired fund fees that are incurred when an ETF buys other funds in its filing and, in its prospectus, expresses the tally of all the costs under “Total Annual Fund Operating Expenses After Expense Waiver/Reimbursement.”
Without the disclosure, the acquired fund fees would have come out of the ETF returns, according to O’Rourke.
“When we first did the filing, the acquired fund fees were zero, and then because we did this new filing, the SEC asked us to estimate what our acquired fund fees would be,” he said
The three existing Direxion funds and the changes to their expense ratios are as follows:
- Direxion S'P 1500 RC Volatility Response Shares ETF (VSPR - News), will have a net expense ratio of 0.62 percent, including a fee waiver of 2.29 percent. Its net expense ratio is now 0.45 percent.
- Direxion S'P 500 RC Volatility Response Shares ETF (VSPY - News) will have a net expense ratio of 0.52 percent, including a fee waiver of 1.64 percent. It currently has a net expense ratio of 0.45 percent.
- Direxion S'P Latin America 40 RC Volatility Response Shares ETF (VLAT - News) will have a net expense ratio of 0.83 percent, including a fee waiver of 2.30 percent. It currently has a net expense ratio of 0.45 percent.
Costs of the two funds that are in registration are as follows:
- Direxion S'P 600 RC Volatility Response Shares, which doesn’t yet have a ticker, will come with a net expense ratio of 0.45 percent, including a 0.24 expense fee waiver
- Direxion Nasdaq Volatility Response Shares (NYSEArca:QVOL) will have a net expense ratio of 0.65 percent, including a 0.09 percent fee waiver
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