Direxion first appeared on the exchange traded fund (ETF) scene in late 2008, when the firm launched the first of a growing line of triple-leveraged funds.
Since then, the provider has ballooned to hold $5.1 billion in assets under management. We caught up with Direxion President and Chief Investment Officer Dan O’Neill to talk about the firm’s history, where they’re going and their thoughts about the future of leveraged and inverse ETFs.
How did Direxion get started? How long has the firm been around?
Potomac Funds was initially started in 1997 by, among others, Tim Hagan and Terry Apple, who were originally employees at Rydex. In 2006, we decided to rename and re-brand Potomac Funds – a name which sounds somewhat historical – to Direxion, a name which seems both more current and descriptive of the goals of our funds. Each of our leveraged index funds and ETFs seek a direction – bull or bear. We spelled Direxion with an “X” to refer to the use of leveraged in our Funds – with “X” being a multiplier.
What prompted the move into ETFs?
Our primary business has been leveraged index mutual funds. A key selling point of leveraged index mutual funds was that they offered liquidity – you could trade into or out of the funds on a daily basis, which distinguished the funds from the wider mutual fund universe and its emphasis on longer holding periods.
However, if you want liquidity, ETFs are superior because they can be traded intra-day. We saw the enormous success of ProShares both in absolute terms and relative to ProFunds, and we realized that daily beta leveraged index products were going to move to the ETF environment.
How did Direxion arrive at the idea for triple leveraged ETFs?
ProShares had enormous success with its ETFs, most of which are 2-beta products. We recognized that if we were going to succeed, we needed to distinguish our products, and we chose to do so primarily around the degree of leverage – we went with 3-beta.
Where do you see Direxion five and 10 years from now?
I would hope that we can be known as a premier provider of tactical investment products. Much of the industry is strategic in nature – it looks at the long-term. However, with so much access to information and technology, some portion of the investment community wants to trade actively and invest tactically. We seek to serve that group. We will continue to build leveraged index products and other products which have a tactical approach.
Are there plans to launch funds that rebalance monthly, as what happened with the mutual funds?
We have filed with the Securities and Exchange Commission (SEC) to create monthly beta ETFs. However, there is currently no timetable for the approval of those ETFs. We believe such products could be enormously popular because such products would need to be monitored less frequently than the current daily beta funds and would therefore presumably be attractive to a larger group of tactical investors.
Also, the introduction of monthly beta funds would further highlight the goals of the current daily beta funds, which would further education of investors about what those funds do. Monthly beta funds will complement rather than replace daily beta funds and will hopefully help the industry continue to evolve and grow.
After the controversy concerning leveraged and inverse ETFs, do you expect much to change in the leveraged and inverse ETF industry?
The controversy around the products has primarily been about the compounding issues – the funds seek daily returns, not returns for longer periods. The investment world is inclined to look at the performance of a product on a standalone basis for long periods. That approach does not really work with these products and such an approach reflects a misunderstanding about what the products are intended to do and how they are used.
Our ETFs and funds are tools to be used in tactical portfolio management. From our perspective, the controversy has exaggerated the level of misunderstanding – I feel that many people who do not use the products have been commenting on the products. Products offered by ProShares and Direxion are among the most liquid names in the marketplace, which means that people understand how to use the funds and are monitoring and trading them actively.
Further, more than $30 billion has been raised in leveraged index ETFs in the last two years or so. If there was serious dissatisfaction about the products, you would not have seen such asset growth. I am not dismissive of the controversy, but I think that the overwhelming bulk of users understand how the funds work and use them properly. The products work well for a segment of the investing universe; they do not suit the eye of a much larger group and that group has been more responsible for the criticism than the actual users. (Assets in bear funds in 2009).
Do you feel that any positives have come out of the controversy?
The controversy has helped broaden the message about the goals of the funds and has essentially accelerated our educational efforts. I object to the tone of much of the criticism and reject the notion that the misunderstanding was due to a lack of effort by the providers. (How to use leveraged and inverse ETFs).
If you look at our prospectus and our website – which have not changed that much since FINRA weighed in on the products – you will realize that we have made remarkable efforts to educate about the implications of seeking leveraged daily betas. (The fight over leveraged and inverse ETFs).
To the extent that the attention has complemented our efforts, we are pleased. Please note that our interest in and emphasis on education is not regulatory response. We want investors to understand how to use our products because educated users have the greatest chance of success and successful investors will return to our products.
For more on leveraged and inverse ETFs, visit the category.
Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.