FLYX Permanently Grounded: Direxion Shuts Down Airline ETF

by on October 11, 2011 | ETFs Mentioned:

Direxion, the company best known for its suite of leveraged and inverse ETFs, began the process of shutting down one of its few non-leveraged funds, the Airlines Shares ETF (FLYX) earlier this week, citing a lack of assets as the main culprit for the fund’s demise. The fund stopped trading on October 10th and over the next week the product will liquidate its portfolio of airline stocks before paying out to investors after that.  The fund never really caught on with investors as the product had assets of less than $3 million and saw volume of roughly 800 shares a day over the past three months. Furthermore, at a 0.55% expense ratio, the product only generated a meager $16,500 for the company in fees, hardly enough to turn a profit for the ETF issuer.

Thanks to this move,  Direxion doesn’t have a single non-leveraged or inverse product in its lineup, suggesting that the company is returning to its roots and is focusing on the products that made the company an ETF leader. “With declining interest in a non-leveraged airline industry ETF, we feel it is in the best interest of the shareholders to close the fund and stick to the product for which we are best known,” Direxion President Dan O’Neill said in a press release.

Despite this set back, Direxion still has 50 ETFs in total including several billion dollar funds and four products that trade at least 20 million shares a day. Beyond these giants, the company still has 11 funds that have more than $100 million in assets and nine that trade at least one million shares a day. In other words, the loss of the airline ETF looks to have a minimal impact on Direxion’s long term plans; instead it appears as though FLYX was merely a trial balloon for non-leveraged products and clearly the company didn’t like the results of the test [see all the Leveraged Equity ETFs].

FAA Still In Flight

For investors looking to maintain exposure to the airline industry, Guggenheim’s Airline ETF (FAA) still exists as a quality option. The fund tracks the NYSE Arca Global Airline Index which is a modified equal-dollar weighted benchmark designed to measure the performance of highly capitalized and liquid U.S. and international passenger airline companies identified as being in the airline industry and listed on developed and emerging global market exchanges. Currently, this gives the product a 22 security composition with heavy weightings going towards Delta, United Continental, and Southwest Airlines, although international companies such as Singapore Air, and All Nippon Airways help to round out the top five [see more on FAA's Fact Sheet].

While the fund does offer quality exposure to the broad airline industry, investors should note that this product isn’t exactly the most popular fund either. FAA has under $17.5 million in assets and trades about 10,000 shares a day, suggesting relatively wide bid ask spreads when compared to other products in the transportation ETF space. This also could mean that if these low asset levels continue, investors could see a similar situation happen to this more established fund as well. However, with the lack of competition in the space and a possible resurgence in the airline industry, this could be the start (finally) of inflows into the space by more investors [see Time To Buy The Airline ETFs?].

[For more ETF news sign up for our free ETF newsletter.]

Disclosure: Long LUV.