Direxion has launched two exchange-traded funds providing single inverse exposure to the performance of US-listed firms operating in the consumer staples and utilities sectors.
The Direxion Daily Consumer Staples Bear 1X Shares (NYSE: SPLZ) and the Direxion Daily Utilities Bear 1X Shares (NYSE: UTLZ) provide unleveraged inverse exposure to US equities from the consumer staples and utilities sectors respectively.
The Direxion Daily Consumer Staples Bear 1X Shares (NYSE: SPLZ) tracks the inverse of the daily performance of the Consumer Staples Select Sector Index, and the Direxion Daily Utilities Bear 1X Shares (NYSE: UTLZ) tracks the inverse of the daily performance of the Utilities Select Sector Index.
Provided by Standard & Poor’s, the indices are composed of S&P 500 Index constituents which have been classified as operating in the consumer staples or utilities sector. Constituents are weighted by market capitalization with a single company cap of 23% and a cap of 50% on the sum of the companies with weights greater than 4.8%.
Each fund is offered with a total expense ratio (TER) of 0.45% due to a contractual fee waiver in place until September 2017. Their gross expense ratios are 0.56%.
The funds may suit investors looking for tactical equity exposure during periods of rising interest rates. Historically, defensive sectors such as consumer staples, healthcare, telecommunications and utilities have underperformed the broader market when rates were increasing.
Rate hikes generally correspond with economic expansion, strong consumerism and low unemployment. As wages rise consumers begin to substitute more expensive discretionary goods for cheaper necessities, leading to the underperformance of the consumer staples sector.
Utilities have also historically underperformed the broader market, showing the lowest correlation among all sectors to the 10-year US Treasury yield. These firms tend to have high debt burdens, making them sensitive to interest rates. Furthermore, yield-hungry investors flocked to utility companies during the recent period of low interest rates which may have overstretched valuations.
Paul Brigandi, Managing Director at Direxion, commented: “The Federal Reserve recently raised interest rates and signaled up to three more increases in 2017 due to a strengthening economy, increasing inflation and a multi-year low unemployment rate. Against that backdrop, investors are concerned a rising-rate environment may have a negative impact on their portfolios. The launch of SPLZ and UTLZ is timely, as they both provide inverse exposure to two sectors having historically high sensitivity to rising rates.”
The launches represent the latest moves by Direxion to build out its suite of 1X inverse US sector ETFs, and will join existing funds targeting the energy, technology and financial sectors: the Direxion Daily Energy Bear 1X Shares (NYSE: ERYY), the Direxion Daily Technology Bear 1X Shares (NYSE: TECZ) and the Direxion Daily Financial Bear 1X Shares (NYSE: FAZZ). Each ETF has a TER of 0.45% and gross expense ratios of 0.56% due to similar contractual fee waivers.
Inverse and leveraged ETFs are intended only for investors with an in-depth understanding of the risks associated with seeking leveraged investment results, and who plan to actively monitor and manage their positions. While these funds may provide an efficient means for sophisticated traders to obtain tactical exposures, they are generally considered unsuitable for retail investors who may not fully understand the risks involved, such as the potential for considerable losses in volatile but range bound markets if the fund is held for an extended period.