Direxion, best known as the leading provider of 3x leveraged and inverse leveraged ETFs, is apparently planning to diversify its product line a bit. The Newton, Massachusetts-based ETF provider has amended a previous filing with the SEC, requesting regulatory approval to launch a 130/30 ETF. Leveraged ETFs have come under fire lately, and while there is certainly no danger of these products going away (at least not in my mind), it certainly won’t hurt Direxion to expand into new areas of the ETF industry.
130/30 strategies are nothing new. Asset managers on both the institutional and retail levels have been implementing these tactics for years. Under such a strategy, funds attempt to outperform a benchmark by holding 130% long exposure to individual securities the manager believes will outperform the market and 30% short exposure to securities expected to trail the market. The result is a portfolio that maintains net 100% exposure to the market, but seeks to generate alpha by shorting losing stocks and doubling down on winners. Many 130/30 managers performed particularly well (relative to their benchmarks at least) during the recent global recession.
The 130/30 concept, however, is relatively new to the world of ETFs. ProShares was recently credited as the first sponsor to offer an ETF that implements a 130/30 strategy, the ProShares Credit Suisse 130/30 ETF (CSM). While this is technically true (it was the first exchange-traded fund to do so), First Trust has been offering a KEYnotes ETN linked to the First Trust Enhanced 130/30 Large Cap Index (JFT) for well over a year. Since JFT is an exchange-traded note, it boasts zero tracking error, but does maintain credit risk related to the financial health of its issuer (in this instance, JP Morgan Chase).
In a filing with the SEC originally made in December, Direxion requested exemptive relief for a variety of different ETF types, including:
- Conventional domestic funds
- 130/30 funds
- Leveraged funds
- Conventional foreign funds
The updated filing, which also includes information on Direxion’s plans for conventional ETFs, provides more details on how a 130/30 fund would establish its positions.
Disclosure: No positions at time of writing.