Q&A: Direxion Managing Director Dishes On Their Lightly Leveraged Funds 6 Months After Launch

In February, leveraged-ETF provider Direxion launched a suite of six new funds. These lightly leveraged “PortfolioPlus ETFs” provide only 25 percent of added daily exposure, compared to the 300 percent of a typical Direxion fund. 

The funds—the PortfolioPlus S&P 500 ETF PPLC (formerly known as the Direxion Daily S&P 500 Bull 1.25X Shares), PortfolioPlus S&P Mid Cap ETF PPMC, PortfolioPlus S&P Small Cap ETF PPSC (formerly the Direxion Daily Small Cap Bull 1.25X Shares), PortfolioPlus Developed Markets ETF PPDM, PortfolioPlus Emerging Markets ETF PPEM and PortfolioPlus Total Bond Market ETF PPTB—are designed to give investors to dip their toe into the waters of leverage without having to go full bore. 

Benzinga caught up with Andy O’Rourke, managing director at Direxion, to get his thoughts on the funds six months after their launch. 

What was the reasoning for launching a family of slightly leveraged ETFs?

O’Rourke: We kind of look at the world in three investment categories. The only category we’re extremely familiar with is the active trader—so they’re thinking in terms of day trades. They’re putting a trade on based on something, at some point that thing will change and they’ll take the trade-off. The other end of the spectrum is the vast majority of the world who thinks strategically. ‘I’m gonna set up an asset allocation portfolio, I’m gonna buy and I’m gonna hold it.’

We do think there’s a category in the middle there, and we refer to it as thematic investing. So it means I think this particular sector or asset class is going to do better than others like it for the next 6-24 months, for example. So I might want to overweight that. That’s what these funds are for.

How exactly are they meant to be used?

O’Rourke: If you’re using these products, you’re going to use them in two basic ways. One is you have that conviction and you want to go overweight for a specific period of time—or you can just feel that way until further notice, in which case you’re buying and holding more strategically. But essentially it gives you that ability to get that overweight position in whatever asset class you have conviction in without having to raise additional capital. So $80,000 of investment into our S&P 500 1.25x product gives you $100,000 of exposure. So you don’t have to raise another $20,000 to buy SPY, you can do the $80,000 into our product and have the same exposure in our product. Same risk, but same exposure for less capital. 

And then the other main purpose is using it as a tool to free up capital. People refer to it sometimes as portable alpha. If you had $100,000 invested in the S&P 500, but you wanted to come up with $20,000 to invest in some other vehicle, well then you could do that. 

What type of traders/investors have been using these funds?

O’Rourke: In terms of our business strategy we’re focused primarily on the advisor world because we think these are great client portfolio tools. We want them to be understanding of the products, being able to explain them to their clients, use them, and then it serves as an endorsement that these can be used by sophisticated investors. So we’re primarily focused on a retail-focused financial advisor market. 

At the same time, we make the products known in the self-directed world, and we hope that those people will do their due diligence, research the products, understand how they work, and potentially use them as well. 

How has the current market environment impacted the funds?

O’Rourke: We’re pleased. We’ve been in a market environment where there are more trends than volatility whipping things around, and that’s a great environment for products that have leverage and reset every day. It helps them build a positive compounding effect, as opposed to when you have volatile markets.

Because volatility eats away at the fund?

O’Rourke: Yea, it can. Nothing’s ever absolute, but yes if you see a real high spike on a given day you just increased your exposure, and then if you see a huge spike down the next day you get a lot of horsepower to wack you back down in the other direction, and then it’s kind of a situation where you lose 50 percent one day and gain 50 percent the next day, you’re still not back to zero. You need to gain 100 percent the second day because you lost performance power. 

What do you hope self-directed investors understand about leverage?

O’Rourke: The key thing here is, first of all, leverage is a tool that everybody uses in some form in some way in their life. If anyone’s buying a house or financing a car, credit cards, everybody uses some form of leverage. The first thing is that leverage isn’t a bad word, and people shouldn’t think of it that way. 

We never have said that everybody should use a triple leveraged ETF, in fact we’ve said the opposite. We think that people should just understand what is leverage, how you use it, is there a difference between a 3x leveraged ETF and a 1.25 leveraged ETF? And what we’re trying to convey is there absolutely is. 

What we want the self-directed investor to do is we want to make sure that if they’re going to use the products, they understand what a daily reset means. That’s an easy 30-60 minute homework assignment. That’s a basic concept, and you’ve got to understand that if you’re gonna use the products. 

Beyond that we want them to realize that, yea you’re increasing your risk metric a bit with a 1.25x product as compared to a non-leveraged product, but not anywhere near the amount of a 3x product. It’s going to behave more like a 1-beta than a 3-beta. 

How common is leverage among institutional managers in your experience?

O’Rourke: A lot of them do. The amount of actively managed funds that use a leverage point of 120-130 percent is way higher than most people probably realize. It really depends on their strategy. 

There’s a ton of fixed income actively managed funds out there that do have a certain amount of leveraged exposure. I don’t know if you remember when the derivatives rule got put out a couple of years ago, I don’t think that the SEC understood how much broad impact it had in certain areas. All kinds of actively managed shops were commenting on that proposal because it would have impacted their strategy in probably a negative way. 

So it’s out there. A lot of people use it. Most truly institutional managers use some form of leverage to execute their strategy. The way we like to look at it is we’re democratizing access to those strategies that otherwise wouldn’t be in their reach or affordable to them. So ‘Hey I want to get a little bit more exposure to this asset class, is there a way to do that?’ And that’s what we put in front of them.

Disclosure: Direxion Investments is a content partner of Benzinga