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Direxion Files for Volatility Response and Leveraged ETFs

Zacks Equity Research

2014 saw a shaky start with heightened volatility in the global markets. The U.S., Europe, China and Japan are all more-or-less unsteady at present, spurring fund issuers to tap the volatility factor of the market more and more.

While several fund managers including iShares and SPDR rushed to put out some low volatility and low risk products, Direxion recently filed for an ETF targeting the S&P 500 Volatility Response Index and intends to allocate the assets in risky and risk-free options (read: Volatility ETFs Crash Signaling Further Volatility?).

Despite putting stress on volatility, Direxion is also planning for a pair of ETFs in the U.S. growth and U.S. mid-cap equities spaces too, indicating that the issuer is not thoroughly bearish on the condition of the U.S. economy.  

Let’s take a look at the proposed funds in detail and realize how these may fit into a portfolio for some investors if the funds get approval (read: PowerShares Launches New Active Multi-Strategy ETF).

The Direxion S&P 500 Volatility Response Shares

This ETF seeks to give investors exposure to the S&P 500 Volatility Response Index.  The Index reacts to the stock market volatility by setting up a volatility target at 12.5%, 15%, or 17.5%. Volatility quotient is decided on the recent levels of CBOE Volatility Index (:VIX).

Unlike various VIX-based funds, the proposed product does not seek to deliver higher returns when the markets get stormy, instead it will contain large cap domestic stocks under the S&P 500 index and U.S. Treasury Bills (the “Cash Component”), per the filing.

As volatility intensifies, coverage in the stock portion will diminish and focus on the cash component will rise or vice versa. The ETF's exposure to stock holdings will range from 10% to 100% while cash component will get an allocation ranging from 0% to 90%. The fund will charge 45 bps for this exposure (read: May ETF Winners and Losers: Consumer Funds Rise, Volatility Sinks).

This fund could be appropriate for investors who seek to safeguard their money amid an unstable market. For competition, this fund will look to be up against another Direxion cousin – Direxion S&P 500 DRRC Volatility Response Shares (VSPY). Launched in 2012, this fund has amassed about $23.3 million so far.

Direxion Daily Russell 1000 Growth Index Bull 1.25x Shares

This leveraged ETF looks to deliver 1.25 times the daily performance of the Russell 1000 Growth Index. Being a leveraged fund, it is only appropriate for active investors who can manage their portfolio on a daily basis.
The index holds stocks that have higher price-to book ratios and higher forecast growth as compared to other stocks. Despite some drags, the U.S. stock markets are currently hovering around multi-year highs thanks to some upbeat economic data, which call for focus on large-cap growth stocks. If this trend continues, the proposed ETF can be a good tool for capital appreciation.
Although the U.S. growth equity world is becoming increasingly crowded, the vast majority of funds tend to reside in the regular unleveraged space. We believe with just 1.25x of leverage, both regular and leveraged ETFs will give the proposed fund a run for money.
In terms of ‘regular’ competition, there will be billion-dollar ETFs like iShares Russell 1000 Growth ETF (IWF) and in the leveraged segment there will be products like ProShares Ultra Russell 1000 Growth ETF (UKF) to pose as competition as both the products track the same index. However, apart from IWF and UKF, several other products can be rivals for assets which are playing in the growth space but not exactly following the Russell 1000 Growth index. 
Direxion Daily Mid Cap Bull 2x Shares

This ETF seeks to track two times exposure to the S&P mid-cap 400 Index on a daily basis. The proposed fund is said to charge 66 bps in fees. We believe mid-caps will be better plays in the current market twirls as these offer considerable growth with lesser risk in comparison to their small-cap counterparts (read: Time to Bet on Mid Cap ETFs?).
For competitors, the list is quite impressive as there are literally dozens of funds that focus on the mid-cap space for their exposure. Among the more targeted choice, investors should be aware of ProShares Ultra MidCap400 (MVV) as a popular competitor in particular as this ProShares fund follows the same index with the same exposure.
MVV has so far accumulated $161.6 million in assets. However, the proposed ETF, if ever approved, should outdo MVV on the expense ratio front as the latter charges much higher fees of 0.95%.
There is yet another fund, ProShares UltraPro Mid Cap 400 Fund (UMDD), which takes the triple leverage stance on the S&P MidCap 400 Index, having generated $45.8 million in AUM thus far.
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