Built for Tactical Moves: Direxion CEO Talks Leveraged, Inverse ETFs

Now that Europe has exited recession and the global economy is recovering, we think this is the ideal time to offer active traders an opportunity to gain leveraged exposure to the most liquid stocks in developed European markets. Some think that Europe is going to continue on a positive path, but there may be fits and starts along the way.

By offering the boldest—300%—exposure to the FTSE Developed Europe Index—in either direction—we’re giving traders the best possible chance of receiving healthy returns and additional diversification, regardless of their investment outlook on the region.

It seems logical the actual name for all leverage and inverse ETFs should contain the amount of leverage (2x or 3x) being used and the target goal (daily). Do you think more uniformity in how these products are labeled is necessary?

We decided very early on that using a straightforward naming format would be in the best interest of all who consider using the funds. Transparency is of the utmost importance with regard to products that can be very volatile in a very short period of time. People who use leveraged ETFs should always be 100% clear about the fact that the funds seek a daily goal, and should always have full knowledge of their leveraged point. There is no better way to ensure this than to put these details in the name of the funds.

While descriptive names are useful, they’re just a start. It’s important for all investors to take on the responsibility to educate themselves about the investments they make. At direxionfunds.com we provide complete explanations, in text and video format, which explain the mechanics and risks of our leveraged ETFs. I would argue that if you understand how to trade options and futures contracts, you should be well suited to learn how to trade leveraged ETFs

From a suitability angle, what are some rules of thumb advisors should keep in mind when using leverage or inverse ETFs for clients?

Well of course, you have to follow your firm’s guidelines regarding the use of leveraged products. Other than that, communication and transparency are key. First, learn about the risks of seeking daily leveraged results. Second, talk to your clients. Understand their risk tolerance and investment objectives. Third, if the first two don’t match, don’t use them. But if you find they’re suitable, these products may help you and your clients manage risk or make profits, no matter what the direction of the market.

Above all, it should be understood that since these products seek a daily goal, they should be monitored very actively. Because the funds reset their market exposure every day, they are not expected to provide 2x or 3x the cumulative return of the benckmark index for periods greater than a day. A general rule of thumb is that when markets are volatile, the funds will typically underperform their multiple of the benchmark’s cumulative return, but during trending markets, they may provide equal to or even greater cumulative returns, as a result of positive compounding.

Although the Direxion Zacks MLP High Income Shares (ZMLP) doesn’t use leverage, it offers an attractive dividend yield compared to bonds. What type of investor might the MLP sector appeal to?

Bonds aren’t considered as much of a “safe haven” as they once were, and in a low-yield environment, income-oriented investors have had an exceedingly difficult time. That’s why we partnered with Zacks Index Services to launch ZMLP.

MLPs are limited partnerships that invest largely in oil and gas infrastructure. They offer steady income, along with certain tax advantages. But they have some tax complexity and liquidity risk. ZMLP is an ETF with a “C-Corp” structure. So it does NOT generate a K-1 tax form like individual MLPs. It can be held in IRAs and 401(k)s, and has the additional benefits of liquidity and transparency that investors demand today. And we’re very happy to have access to Zacks’ proprietary security selection process for identifying the most stable and liquid MLPs to benefit investors in our new ETF.