Direxion has launched three new equity ETFs on NYSE Arca that deploy systematic, rules-based strategies to achieve favourable portfolio performance compared to traditional beta approaches.
Dave Mazza, Managing Director and Head of Product at Direxion.
Aimed at longer-term investors, the funds follow up on the issuer’s launch in February of a trio of similarly-minded strategic beta equity funds.
Strategic beta funds combine active management insight with the discipline of a rules-based approach in the construction of a passive index.
Collectively, the six funds provide confirmation of an evolution of approach for Direxion which, until recently, has been known for its inverse and leveraged ETFs aimed at high-frequency traders seeking tools to express short-term tactical conviction trades.
The latest ETF launches offer exposure to US equity strategies that draw upon an assortment of investment ideas, including dynamic downside risk management, sustainable growth, and contrarian mean-reversion themes.
Dave Mazza, Managing Director at Direxion, commented, “Recent market events have reminded investors about the need for diversification and created opportunities to introduce unique exposures in portfolios. We’re excited to introduce these strategies to help investors build more robust portfolios in a challenging market environment.”
Rob Nestor, President at Direxion, added, “As noted earlier this year, Direxion remains committed to introducing new products that offer exposure to longer-term investment themes, while remaining a leading leveraged and inverse ETF provider for traders.”
The ETFs
The Direxion Dynamic Hedge ETF (DYHG US) is designed to act as a potential core US large-cap holding. The fund essentially provides exposure to the S&P 500 Index with an in-built variable hedge, by way of a short position in S&P 500 futures, that seeks to mitigate equity market risk.
The ETF’s underlying index is the Salt truVol US Large Cap Dynamic Hedge Index, designed by New York-based ETF start-up Salt Financial. The strategy leverages Salt’s proprietary analytic tool, truVol, which uses intraday price data in a bid to estimate future equity volatility.
The index consists of a fixed 95% allocation to the S&P 500 Total Return Index and a 5% allocation to non-interest-bearing cash which accounts for the margin required to maintain a variable short position in the S&P 500 Futures Excess Return Index.
The allocation to the short futures position will fluctuate between 0% (no equity hedging) and -95% (fully equity hedged) depending on truVol’s volatility estimate. This ‘Hedge Ratio’ is updated daily with a one-day lag and includes a buffer rule to help limit unnecessary turnover.
The fund comes with an expense ratio of 0.57%.
Direxion’s second launch is the Direxion High Growth ETF (HIPR US) which targets US large- and mid-cap stocks with the potential for sustained growth. The fund selects stocks based on a combination of traditional growth measures (revenue, earnings, and cash flow growth) and quality and price momentum characteristics.
The ETF tracks the Russell 1000 Hyper Growth Index which includes all constituents from the parent Russell 1000 Index but uses factor tilts to increase the weight of stocks with growth, quality, and momentum characteristics. The methodology also uses ‘corrective tilts’ to ensure the index’s exposure to value and volatility factors matches that of the parent universe. The index is rebalanced semi-annually.
The fund comes with an expense ratio of 0.40%.
The third ETF is the Direxion Fallen Knives ETF (NIFE US) which follows a US equity mean-reversion strategy.
Mean-reversion assumes that there is an underlying stable trend in the price of an asset and prices fluctuate randomly around this trend. Values deviating far from the trend will tend to reverse direction and revert to the trend.
The underlying Indxx US Fallen Knives Index tracks companies with recent short-term negative returns that are expected to rebound based on momentum and financial health indicators.
The methodology selects constituents from a universe of US-listed common stocks and American Depository Receipts with market capitalizations above $500 million and average daily trading volume greater than $5m. Securities with a one-year total return excluding the most recent month below -15% are short-listed.
These securities are then assigned a composite quality score based on three metrics: current ratio, cash flow coverage ratio, and debt to equity. The top 50 securities with the highest composite scores are selected and weighted by free-float market capitalization subject to a cap of 4.9%. The index is reconstituted annually and rebalanced semi-annually with buffer rules to limit unnecessary turnover.
The fund comes with an expense ratio of 0.50%.