Wednesday, August 8, 2012

Direxion to Close Several Leveraged ETFs

By Tim Dulaney, PhD

Direxion Shares ETF Trust announced last week that -- upon recommendation of the trust's advisor Rafferty Asset Management, LLC -- nine daily leveraged and inverse Exchange Traded Funds will be liquidated and shares will no longer be open for purchase as of early next month.  From the announcement,
Due to the Funds' inability to attract sufficient investment assets, Rafferty believes they cannot continue to conduct their business and operations in an economically efficient manner. As a result, the Board concluded that liquidating and shuttering the Funds would be in the best interests of the Funds and their shareholders.
The nine leveraged and inverse leveraged ETFs that will be closing in the coming weeks are unfortunately some of the most clever ETF tickers out there.  Here's the list of soon-to-be-history funds:
  1. Direxion Daily Agribusiness Bull 3X Shares (COWL): 
    • Assets Under Management (8/1/2012): $2.41MM 
    • Average Daily Trading Volume (5/1/2012 - 8/1/2012): 4,347
    • Daily Leverage: 300%
  2. Direxion Daily Agribusiness Bear 3X Shares (COWS) : 
    • Assets Under Management (8/1/2012): $1.14MM
    • Average Daily Trading Volume (5/1/2012 - 8/1/2012): 1,115
    • Daily Leverage: -300%
  3. Direxion Daily Basic Materials Bear 3X Shares (MATS):  
    • Assets Under Management (8/1/2012): $1.30MM
    • Average Daily Trading Volume (5/1/2012 - 8/1/2012): 4,739
    • Daily Leverage: -300%
  4. Direxion Daily BRIC Bull 3X Shares (BRIL): 
    • Assets Under Management (8/1/2012): $5.00MM
    • Average Daily Trading Volume (5/1/2012 - 8/1/2012): 1,115
    • Daily Leverage: 300%
  5. Direxion Daily BRIC Bear 3X Shares (BRIS):  
    • Assets Under Management (8/1/2012): $2.69MM
    • Average Daily Trading Volume (5/1/2012 - 8/1/2012): 6,009
    • Daily Leverage: -300%
  6. Direxion Daily Healthcare Bear 3X Shares (SICK): 
    • Assets Under Management (8/1/2012): $2.10MM
    • Average Daily Trading Volume (5/1/2012 - 8/1/2012): 799
    • Daily Leverage: -300%
  7. Direxion Daily India Bear 3X Shares (INDZ): 
    • Assets Under Management (8/1/2012): $4.28MM
    • Average Daily Trading Volume (5/1/2012 - 8/1/2012): 12,633
    • Daily Leverage: -300%
  8. Direxion Daily Latin America Bear 3X Shares (LHB): 
    • Assets Under Management (8/1/2012): $4.18MM
    • Average Daily Trading Volume (5/1/2012 - 8/1/2012): 28,478
    • Daily Leverage: -300%
  9. Direxion Daily Retail Bear 3X Shares (RETS): 
    • Assets Under Management (8/1/2012): $2.71MM
    • Average Daily Trading Volume (5/1/2012 - 8/1/2012): 19,347
    • Daily Leverage: -300%
Direxion currently offers 49 leveraged or inverse leveraged ETFs with total assets of just over $6 billion (as of 8/1/2012).  These nine leveraged and inverse leveraged ETFs represent approximately 0.5% of the total assets under management as of 8/1/2012.  Direxion has chosen to continue offering, at least for now, MATL (the 3x bull analog of MATS) and RETL (the 3x bull analog of RETS) even though both of these funds had less than $5MM in assets (as of 8/1/2012) and an average trading volume of less than 6,000 shares over the past three months.

It is possible that, following regulatory actions (including, for example, FINRA sanctioning sellers of LETFs), the solicited purchases of LETF shares by retail customers has finally waned.  On the other hand, perhaps these funds were just the victims of a glut of inventory and choices investors currently face when choosing an LETF.  

3 comments:

  1. Dr. Dulaney,

    The leverage ratios for all nine funds are either 3 or -3. Do you think there is a reason for that?

    Thanks!

    ReplyDelete
  2. The first thing to notice is that there are two pairs -- one positively leveraged and one negatively leveraged ETF with the same underlying index -- of leveraged ETFs being closed: (COWL and COWS) and (BRIL and BRIS). Closing in pairs makes sense intuitively since there is likely a some savings of hedging costs when offering paired leveraged ETFs. Beyond these pairs, only inverse leveraged (-3x) ETFs are closing.

    The reason Direxion could be focusing on closing these unpaired funds is that the hedging costs may be particularly high. Henderson and Seguin showed that the hedging cost for (-3x) leveraged ETFs is higher than that of (3x) leveraged ETFs. See the following paper for more information:

    http://www.terry.uga.edu/finance/docs/seguin-hedging.pdf

    Of course, this is probably also a function of Direxion's LETF line-up. Of the 49 LETFs currently offered by Direxion, only three ETFs offer a leverage amount other than (3x) or (-3x): SAGG, TYBS and TYNS.

    ReplyDelete
  3. Thanks for the reply. I really appreciate it!

    ReplyDelete

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