Trade Like An Insider With The All Cap Insider Sentiment ETF (KNOW)

Daniela Pylypczak: Ed Egilinsky is the Head of Alternative Investments at Direxion, a Boston-based ETF issuer best known providing inverse and leveraged products. He recently took time out of his busy schedule to discuss Direxion’s All Cap Insider Sentiment Shares, KNOW, as well as his take on the evolution of the ETF industry over the last several years.

ETF Database (ETFdb): What was the inspiration behind creating the All Cap Insider Sentiment ETF (NYSEARCA:KNOW)?

Ed Egilinsky (EE): Direxion’s expertise has always been in providing exposure to index based strategies – to both the retail and institutional investor. Our strategies include both tradable vehicles for those who have a short term opinion of the market as well as “buy and hold” strategies for those advisors who are asset allocators. Investors are always looking for ways to try and generate alpha relative to the broader equity benchmarks with an eye towards lower volatility.

The Sabrient Multi-cap Insider/Analyst Quant-weighted Index (SBRQAM), which KNOW tracks as its benchmark, is an intelligent equity index that seeks to outperform mutli-cap U.S. equity indices. We chose Sabrient as the Index provider because of their pedigree and experience in creating rules-based alpha-generating equity index strategies. This index strategy is unique as it allows investors to participate in those stocks that are being most heavily accumulated by corporate insiders.

ETFdb: What is the objective of the fund and how does the fund work?

EE: The Fund is called the Direxion All-Cap Insider Sentiment ETF (KNOW) and its objective is to outperform a broad based U.S. equity index. The fund seeks to track the performance of the Sabrient Multi-cap Insider/Analyst Quant-weighted Index. It’s a rules-based index that seeks to generate alpha relative to U.S. equity benchmarks.  It conducts a regular review of each of the top 1500 stocks by market cap and to identify those that show strong buying activity on the part of corporate insiders both in number of buyers and amount of shares, as well as favorable analyst revisions. At times, the Insider Sentiment strategy consists of a composition of stocks and sector weightings that can vary significantly from traditional equity indices. Also of note, recently the index implemented a defensive overlay designed to mitigate downside risk and attempt to preserve alpha by placing a heavier weighting to those selected stocks that have shown better risk/return characteristics during periods of equity distress.

ETFdb: Why does it make sense to use the ETF wrapper for investors looking to pursue this sort of strategy?

EE: We are generally fund-structure agnostic. Since this is a pure equity based strategy, we feel that it is more conducive to an ETF wrapper. We wanted our strategy to have similar trading characteristics to other equity index based strategies which give you the flexibility of trading intra-day. However we look at the Insider Sentiment ETF as a static “buy and hold” staple in an overall equity allocation [see also Quant-Based ETFs In Focus].

ETFdb: How might KNOW fit into a portfolio? Would you consider this as a core, or more tactical holding?

EE: KNOW is an alpha-seeking strategy that can serve as great compliment to an overall equity allocation. If an investor is gaining broad market equity exposure through traditional beta-seeking indexes, KNOW presents an intelligent overlay that seeks to isolate stocks that are expected to outperform. This is a way for investors to participate in those companies that corporate insiders are buying and that analysts have raised their earnings forecasts.

ETFdb: There are some out there who believe ETFs have gone too far from their initial intention of offering broad-based exposure to buy-and-hold investors. What’s your take on the innovation in the ETF industry over the last several years?

EE: It is true that there has been a tremendous amount of innovation in the ETF space. The majority of the ETF growth can be attributed to providing a low cost approach to traditional index investing which were very straightforward and tied to more static based indexes. Much of the recent development in the ETF space can be attributed to the innovation of strategy-based indexes that are more dynamic and responsive than traditional beta strategies. Some of these active index-based ETFs are providing investors access to institutional style strategies, which are often very cost effective and transparent.

While many of these more innovative strategies are very interesting and promising, the most important factor is that investors understand the objectives of the funds and feel they make sense to incorporate into their portfolios. In order for the funds to attract assets, the strategies need to provide added diversification and differentiate themselves from more passive approaches to investing. As we strive to develop innovative products, we consciously seek rules -based alternative index strategies that are both dynamic in nature and transparent.

Bottom Line: Finding meaningful returns has proven to be a difficult task for investors and issuers alike in recent years. Innovative issuers, such as Direxion, strive to fill in this gap with unique products like KNOW that have the potential to generate alpha while still offering exposure to an asset class that is at the core of many long-term portfolios.

Written By Daniela Pylypczak From ETF Database  Disclosure: No positions at time of writing.

ETF Database is committed to giving our audience, consisting of both active traders and buy-and-hold investors, information that, to our knowledge, is truthful and non-biased. [For more ETF insights, sign up for our free ETF newsletter or try a free seven day trial of ETFdb ProETFdb Pro Members Only.]

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