Direxion launches dynamic “volatility response” ETFs

Jan 11th, 2012 | By | Category: Alternatives / Multi-Asset

Direxion, the ETF provider perhaps best known for its range of leveraged products popular with high-frequency traders, is fast becoming a name in the buy-and-hold space.

Direxion launches three buy-and-hold “volatility response” ETFs

Direxion has launched a range of buy-and-hold “volatility response” ETFs.

The US-based company has announced that it has launched three exchange-traded funds, designed to be held long term, that seek to better control risk in equity investments.

The funds, which track indices in the newly launched S&P Dynamic Rebalancing Risk Control Index Series, aim to deliver index equity exposure but with improved risk/return characteristics compared to traditional index investing.

Unlike traditional ETFs that offer constant exposure, these funds employ a dynamic, rules-based investment approach that uses volatility as a gauge to determine equity exposure. They operate according to a principle adhered to by many active fund managers that exposure to equities should be reduced during periods of higher overall market volatility, and increased during periods of a more stable (lower volatility) market environment.

Each fund has a target volatility level for its corresponding index. When volatility moves above those levels, the funds will increase their exposure to US Treasuries and decrease their exposure to equities. The funds will proportionately increase exposure to equities during periods of low market volatility.

Direxion has structured the funds so that adjustments can be made quickly and frequently, even on a daily basis, as the methodology dictates. The volatility levels of the corresponding indices are monitored daily, and equity/US Treasury Bills exposure allocations are rebalanced on a monthly basis, at minimum.

Alka Banerjee, Vice President at S&P Indices, said, “by integrating a volatility control measure, the S&P Dynamic Rebalancing Risk Control Index Series provides a new level of innovation for investors looking to gain exposure to developed and emerging markets while controlling the level of risk typically associated with investing in these markets.”

Commenting on the launch, Ed Egilinsky, Managing Director of Alternative Investments at Direxion, said, “these new funds are an intelligent way for equity investors to mitigate risk.”

Egilinsky noted that periods of higher-than-average market volatility tend to coincide with potentially adverse equity markets, while periods of below-average market volatility tend to represent a more stable environment and a greater likelihood of favourable equity market conditions.

“By tracking indices that use volatility to dictate overall equity exposure, these funds serve as a means for investors to gain exposure to equities, while seeking to help protect their portfolios” said Egilinsky.

The three ETFs, detailed below, are listed on the NYSE .

Direxion S&P 500 RC Volatility Response Shares (Ticker: VSPY)

Direxion S&P 1500 RC Volatility Response Shares (Ticker: VSPR)

Direxion S&P Latin America 40 RC Volatility Response Shares (Ticker: VLAT)

These funds follow the company’s launch last year of a series of ETFs that utilise indicators of insider sentiment – namely stock purchases by corporate insiders – to allocate weightings to US equities.

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