A new suite of exchange-traded funds gives traders a chance to go bigger on relative-value plays, by allowing them to invest one group of stocks — say, value stocks — while shorting the opposite group — in this case, growth stocks.
In mid-January, Direxion launched the first 10 ETFs of its new Relative Weight suite, providing a way to potentially amplify profits from specific relative-value investment strategies — for example, a bet that growth will outperform value or small-caps will beat large-caps.
The ETFs track passive indexes that overweight exposure to a favored group of securities, while short-selling those in an unfavored group. This allows investors to seek additional returns from the favored group, while maximizing returns from the performance spread between both groups.
The launch is part of a firm evolution offering new products to help a wider swath of investors beyond Direxion’s core constituencies.
“Direxion has had a tremendous franchise, but in a fairly narrow area of tactical traders,” Rob Nestor, president and head of Direxion, told ThinkAdvisor. Nestor joined Direxion almost nine months ago, after spending 26 years in in a variety of leadership capacities at Vanguard — helping the firm launch its first ETF — and BlackRock.
Nestor added that, while tactical investors have been great business for Direxion, far larger pools of investment are outside of that realm — both monetarily and philosophically.
“One of the things we really wanted to focus on was how could we take our core competency around what has historically been providing precise and amplified exposures mostly in the tactical space and … how could we reframe that to be relevant to a much wider set of investors?” Nestor told ThinkAdvisor.
The Relative Weight product suite helps Direxion reach top-down macro-thematic investors who have horizons of 6, 12 or 24 months. Whereas, tactical traders often have horizons of days to weeks.
Investors continually consider which group of securities may be poised to move higher or lower, based on any number of economic or capital markets forces.
These investors may believe value will outperform growth, or emerging markets will outperform developed ones, for example, and “they select products and they build portfolios based on the insight they believe they have in predicting near-term movements,” Nestor explained.
The relative weight strategy allows investors to capture both sides of these expressed views. Whereas, for practical or firm-policy reasons, the only options for most advisors are long-only constrained investments.
The 10 new ETFs cover five well-known investment pairs — value and growth; large-cap and small-cap; cyclicals and defensives; emerging markets and developing markets; and U.S. and international.
Dave Mazza, managing director and head of product of Direxion, explained how the ETFs are expressed as pairs.
“It’s greater exposure to value stocks with less exposure to growth stocks then you would find in a traditional means of constructing this,” he told ThinkAdvisor.
The index for each Relative Weight ETF is built with a 150% long component and 50% short component, resulting in a net exposure of 100% of assets. Each ETF and its benchmark index has an oppositely weighted counterpart.
“We take that $100 of capital — to use that as an example —– and give an additional $50 to value and in this case short $50 worth of growth,” Mazza explained. “So now it’s 150% exposure to value and 50% short growth.”
The ETFs provide relative outperformance if the long component outperforms the short component. The strategy implements the long side of the trade, and then also rewards an investor when a macro view is correct.
“So I get the benefit of my view on the long side hopefully being correct, but now I get part of that spread return — the difference between value beating growth in this example,” Mazza said.
According to Nestor, the relative weight strategy is accessing the entire yield.
“If I think growth is going to outperform more broadly, that doesn’t just mean growth is going to outperform the market, it also means that value is going to underperform because they’re reciprocals of each other,” he explained. “Today, most long-only investors are only getting half that yield.”
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