New Margin Rule Plays A Role In The Popular Direxion Financial ETFs (FAZ, FAS)
“Leveraged ETFs have found themselves in the regulatory spotlight repeatedly over the last year. Several investors who failed to understand the math behind leveraged ETFs have filed lawsuits against ProShares and Direxion, alleging that investments in these products caused them to incur big losses (read more about these lawsuits here and here). The SEC has put a temporary freeze on approval of new derivatives-based ETFs and mutual funds, saying that it wants to take a closer look at investor protections afforded by these products,” Michael Johnston Reports From ETF Database.
And late last week the Financial Industry Regulatory Authority finally implemented a rule that it had originally planned to introduce in late 2009, increasing the minimum margin requirement for leveraged ETFs “by a factor commensurate with the leverage of the ETF.”
Johnston goes on to say, “Previously, margin requirements on leveraged ETFs had ranged from 25% to 30%, depending on the whether the exposure maintained was long or short. According to the new regulations, the new margin requirements will be computed by multiplying previous requirements by the leverage provided (e.g., 2x, 3x). See more on how the new regulations will impact requirements here.”
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“The changes will also impact the amount of money day traders will have to keep in their margin accounts, with the normal $25,000 maintenance requirement now being multiplied by the leverage factor of the ETF. It’s unclear how much of an impact the new changes will have on leveraged ETFs. Some have noted that many users of these products don’t use them within a margin account, meaning that the impact would be minimal. The new rules were originally scheduled to be rolled out on December 1, but were pushed back until the end of April,” Johnston Reports.
Olivier Ludwig From Index Universe put it like this, “For example, pattern day traders in margin accounts using ProShares funds that multiply returns by a factor of 2 would have a $50,000 minimum daily maintenance requirement. Such traders favoring Direxion triple-exposure funds would have a $75,000 minimum daily maintenance requirement.”
Some of the most popular leveraged ETFs, which will now have follow the new margin rule include the Direxion Daily Financial Bear 3X ETF (NYSE:FAZ) and The Direxion Daily Financial Bull 3X ETF (NYSE:FAS). We have put together some details on the two ETFs below for you to take a look at below:
Direxion Daily Financial Bear 3X Shares (NYSE: FAZ)
Fund Objective
The Financial Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the Russell 1000® Financial Services Index (“Financial Index”). There is no guarantee the fund will meet its stated investment objective.
Target Index
The Russell 1000® Financial Services Index is a capitalization-weighted index of companies that provide financial services. As of April 30, 2008, the Index had 227 components, derived from the Russell 1000 Index with an average market capitalization of over $11 billion dollars and a median market capitalization of $4.4 billion dollars. One cannot directly invest in an Index.
Index Sector Weightings
| Banks: Diversified | 24.49% |
| Diversified Financial Services | 23.84% |
| Real Estate Invt. Trusts (REITS) | 11.59% |
| Financial Data & Systems | 9.67% |
| Insurance: Property-Casualty | 8.00% |
| Asset Mgmt. & Custodian | 6.02% |
| Insurance: Multi-Line | 5.68% |
| Insurance: Life | 4.30% |
| Securities Brokerage & Svcs | 3.95% |
| Banks: Svgs/Thrifts & Mort Lend | 1.46% |
| Real Estate | 0.57% |
| Consumer Lending | 0.42% |
Data as of 12/31/2009 is subject to change at any time.
Direxion Daily Financial Bull 3X Shares (NYSE: FAS)
Fund Objective
The Financial Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the price performance of the Russell 1000® Financial Services Index (“Financial Index”). There is no guarantee the fund will meet its stated investment objective.
Target Index
The Russell 1000® Financial Services Index is a capitalization-weighted index of companies that provide financial services. As of April 30, 2008, the Index had 227 components, derived from the Russell 1000 Index with an average market capitalization of over $11 billion dollars and a median market capitalization of $4.4 billion dollars. One cannot directly invest in an Index.
Index Sector Weightings
| Banks: Diversified | 24.49% |
| Diversified Financial Services | 23.84% |
| Real Estate Invt. Trusts (REITS) | 11.59% |
| Financial Data & Systems | 9.67% |
| Insurance: Property-Casualty | 8.00% |
| Asset Mgmt. & Custodian | 6.02% |
| Insurance: Multi-Line | 5.68% |
| Insurance: Life | 4.30% |
| Securities Brokerage & Svcs | 3.95% |
| Banks: Svgs/Thrifts & Mort Lend | 1.46% |
| Real Estate | 0.57% |
| Consumer Lending | 0.42% |
Data as of 12/31/2009 is subject to change at any time.
more taking over of wall street to protect the “little guys”
ha they are laughing as they create more regulations to hinder traders.
Hi,
Do you know where are quoted the options of FAZ and FAS and, more important, where I can find options charts concerning these two etfs ?
Thanks.
Sal.
Hey, I’m having a problem viewing your site in my browser. Could you please check this. My browser is Opera 7 btw.
Robert,
I was researching the EFT and saw this, thought you might take a look to see if this affected you.
Maybe they should of waited a few weeks to split the shares….. cause they may be reverse splitting this baby soooooooooon!
makes no %^&% sense! daytraders make money on these stock investors lose money. why then increase margin on daytraders???
This is a joke. The idiots who lost money compared to the indexes were HOLDING these, which you CANNOT do on PDT margin. Taking away PDT margin only hurts the independent professionals who know what we’re doing and does NOTHING to protect people from losing their money from leveraged decay.
It’s more of some kind of protection for the idoit investors who bought the farm on margin and lost their shirt when the market turned. They are probably in the waiting room of the lawyers filing class action lawsuits against Direxion!
It’s associated with margin, so if you are in a cash account, it means nothing. Pattern day trading accounts require a minimum of $25,000 in cash or equities. For FAZ/FAZ etc the minimum requirement is now $75,000 as it’s a 3x fund. A 2x fund would be $50,000 (ie Proshares’ URE.)
If you are not identified as a pattern day trader, you can buy it in cash or your normal margin borrowing of 2x.
WTF does this mean in layman terms? What is the minimum you can buy? what if you have already had this crap for awhile? What if you are just sitting around waiting for it to go back up? you have to have “$50,000 minimum daily maintenance requirement. Such traders favoring Direxion triple-exposure funds would have a $75,000 minimum daily maintenance requirement.”??????