Direxion's Managing Director Explains When, Why, And How To Use Their New Lightly Leveraged ETFs

Earlier this month Direxion announced the creation of four new lightly leveraged ETFs, bringing their total number of funds that employ 1.25x leverage to six.

In addition to the previously existing S&P large and small cap funds—which now go by Portfolio+ S&P 500 ETF PPLC and Portfolio+ S&P Small Cap ETF PPSC—the lightly leveraged category now includes the Portfolio+ S&P Mid Cap ETF PPMC, Portfolio+ Developed Markets ETF PPDM, Portfolio+ Emerging Markets ETF PPEM, and Portfolio+ Total Bond Market ETF PPTB. 

On the heels of the market’s first real period of volatility in two years, which served as a reminder to many to always understand what you own, Benzinga spoke with Direxion Managing Director Andy O’Rourke about how these new funds work, and who they’re best suited for.

Why did Direxion decide to expand the group of lightly leveraged products?

O’Rourke: We’ve conducted more research just sort of looking at the numbers and understanding how these types of products can be utilized. We’ve also been talking with different advisors about how they think they might be able to utilize the products, and it gave us a better understanding that these are absolutely great tools that have a very different purpose than other products that have a higher leverage point.

We wanted to position them a lot differently so people could draw a distinction between our two product sets and realize there’s a completely different purpose to these products.

What is the purpose of these funds?

O’Rourke: The idea here is we’re developing products that are meant to be used in buy-and-hold asset allocation portfolios. So we did all the analysis to find out how well they would behave in that environment. All the numbers came back really strong and we liked what we were seeing.

They can be applied to asset allocation portfolios. For those people that are looking to get a little more strength out of the asset classes that they’re allocating to—particularly those that are using passive index etfs— without having to raise additional capital, they can actually get increased exposure at a manageable level to the different asset classes that we offer products in.

So they’re meant to be used on top of index funds?

O’Rourke: Or a partial replacement thereof. So if people have a certain allocation to any of those particular indexes [that the Portfolio+ ETFs track] or indexes that are similar to them, they can, without having to raise more capital to increase exposure, replace their existing position with the Portfolio+ ETF and they automatically are getting a higher exposure.

There are a lot of different strategies. It could be just be that I want more of what I have. It could be that I want to get a little more exposure and free up a little bit of capital.

Essentially what you’re trying to do is use the products to increase your risk-adjusted returns, whether it be through diversification or the higher upside potential, without significantly changing your risk profile.

How does the light leverage impact how the fund behaves?

O’Rourke: The thing to understand is they behave way more similarly to a one beta ETF than they do something with a considerably higher leverage point like a 2x or 3x. They’re still structured the same way. They still have a daily goal, they still reset their assets to exposure every day, and so that means they’re still going to have compounding impacts, both positive and negative. But what we find is — with products at this leverage point — the positive compounding, particularly in moderate to low-level volatility environments or in trending markets, tends to be present way more often than the negative compounding.

Who are these funds meant for?

O’Rourke: The lowest hanging fruit, and this is a growing group, are people who are already focused on passive indexing. And more and more people over the last several years are realizing that ETFs are a great vehicle for that. If there are those people out there that are managing portfolios by passive indexing primarily through ETFs, these are ideal for that group.

Ultimately, we’re really talking about anyone who’s in the business of trying to build the right asset allocation models and gain exposure to them in efficient ways. So definitely your mainstream financial planner that is trying to do that.

So you see them being used more by institutional investors.

O’Rourke: I think the focus is on those people who are creating asset allocation models. So who are those for? That’s obviously huge in the advisor-overseeing retail space. But, at the same time, certainly there are a lot of institutional investors that are geared towards dialing into a certain beta point, and these would be tools they could use to try and increase their beta.

But our main focus in terms of who we’re trying to get the word out to is all types of financial advisors. We’ll probably be most focused out of the gate on registered investment advisors because i think they are the group that are most likely to look into this, do their research, understand how the products can behave, and would probably be on the leading edge of using a product like this. From there, we’ll hope that other people see their benefits and start using them as well.