Michael Johnston: Direxion, one of the largest issuers of leveraged exchange-traded funds, will make significant changes to ten of its products next week. The Direxion ETFs currently offering 2x and -2x exposure to their underlying index will begin seeking to deliver daily results that correspond to 3x or -3x of the related benchmark. That change will obviously increase the volatility of these products, and will also have an impact on margin requirements for investors with positions in these funds.
The changes affect five pairs of products, including leveraged ETFs focusing on BRIC stocks, Indian equities, gold miners, natural gas firms, and retail companies:
|Ticker||Previous ETF Name||New ETF Name|
|BRIL||Daily BRIC Bull 2x Shares||Daily BRIC Bull 3x Shares|
|BRIS||Daily BRIC Bear 2x Shares||Daily BRIC Bear 3x Shares|
|INDL||Daily India Bull 2x Shares||Daily India Bull 3x Shares|
|INDZ||Daily India Bear 2x Shares||Daily India Bear 3x Shares|
|NUGT||Daily Gold Miners Bull 2x Shares||Daily Gold Miners Bull 3x Shares|
|DUST||Daily Gold Miners Bear 2x Shares||Daily Gold Miners Bear 3x Shares|
|GASL||Daily Natural Gas Related Bull 2x Shares||Daily Natural Gas Related Bull 3x Shares|
|GASX||Daily Natural Gas Related Bear 2x Shares||Daily Natural Gas Related Bear 3x Shares|
|RETL||Daily Retail Bull 2x Shares||Daily Retail Bull 3x Shares|
|RETS||Daily Retail Bear 2x Shares||Daily Retail Bear 3x Shares|
Effective December 1st these ETFs will deliver 3x or -3x daily leveraged returns, essentially increasing the volatility and risk of these funds by 50%. Also of note for investors with positions in these products are changes to margin requirements. In 2009 FINRA introduced new rules governing the margin requirements for leveraged ETFs; for long positions, the required margin is equal to the product of the target multiple times 25% (i.e., 75% of market value for 3x products).
Upon completion of this transition Direxion will offer more than 40 3x and -3x leveraged ETFs, including products linked to broad indexes such as the Russell 1000 and more targeted benchmarks focusing on specific international stock markets or domestic and global sectors. The Direxion ETF lineup also includes several leveraged bond ETFs and a handful of 1x inverse stock and bond funds [see The Ultimate Guide To Leveraged ETFs].
All of the Direxion ETFs impacted by the change implement daily resets of exposure, meaning that these products are designed to achieve their objectives over the course of a single trading day only. When held for periods longer or shorter than a single session, the path and volatility of the underlying index will impact the returns realized.
Written By Michael Johnston From ETF Database Disclosure: No positions at time of writing.
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