Direxion, the US-based ETF provider best known for its range of leveraged & inverse funds, has announced plans to remove the leverage capacity built in to its suite of dynamic ‘Risk-Control (RC) Volatility Response’ ETFs.
The funds to be affected are the Direxion S&P 1500 RC Volatility Response Shares (VSPR), the Direxion S&P 500 RC Volatility Response Shares (VSPY) and the Direxion S&P Latin America 40 RC Volatility Response Shares (VLAT).
The funds, which were launched earlier this year, are designed to be held long term and aim to deliver index equity exposure, but with improved risk/return characteristics compared to traditional buy-and-hold index investing.
Unlike conventional equity ETFs that offer constant exposure, the Risk-Control Volatility Response funds follow a dynamic, rules-based investment approach that uses volatility as a gauge to determine equity exposure. As volatility increases, risk is mitigated by reducing exposure to equities and increasing exposure to Treasury Bills; correspondingly, as volatility decreases, exposure to equities is increased and exposure to Treasury Bills is decreased.
Currently, during times of low, below-target volatility the exposure to equities can reach up to 150%. However, as of 14 June, the percentage exposure to equities will range between 10% and 100%, and will be capped at 100%. Accordingly, exposure to Treasury Bills will range between 0% and 90%.
The move reflects a greater emphasis on risk mitigation and downside protection, and comes after increased attention and scrutiny of leveraged ETFs from regulators.
“These funds can be valuable tools that equity investors can use to help mitigate risk more effectively,” said Ed Egilinsky, Managing Director and Head of Alternative Investments at Direxion. “Since periods of lower volatility have historically tended to offer growth opportunities, while periods of higher volatility usually indicate an increase in overall market risk, tracking volatility as a gauge for exposure to equities is an intelligent way for investors to protect their assets.”