Volatility-linked assets and exchange traded funds have become a staple for some investors in this tumultuous market. Direxion came out with its own line of volatility-based ETFs, but now, the company is lowering the level of exposure the funds will take during times of low volatility.
According to a press release, Direxion will change the principal investment strategy of Direxion S&P 1500 RC Volatility Response Shares (NYSEArca: VSPR), Direxion S&P 500 RC Volatility Response Shares (NYSEArca: VSPY) and Direxion S&P Latin America 40 RC Volatility Response Shares (NYSEArca: VLAT).
The funds try follow a Risk Control Index, which are designed to respond to the volatility levels of the underlying indices by adjusting its exposure to equities and U.S. Treasury Bills based on market volatility. [Sell in May: Stock ETFs Under the Gun]
Currently, the funds may hold up to a 150% allocation into equities and 0% in T-Bills when the exponential volatility is at 10%, or the fund may hold 15% in equities and 85% in T-Bills when the exponential volatility reaches 100%.
However, effective on or about June 14, the percent exposure to equities will range between 10% and 100%, and the exposure to T-Bills will range between 0% to 90%.
“These Funds can be valuable tools that equity investors can use to help mitigate risk more effectively,” Ed Egilinsky, Managing Director and Head of Alternative Investments at Direxion, said in the press release. “Since periods of lower volatility have historically tended to offer growth opportunities, while periods of higher volatility usually indicate an increase in overall market risk, tracking volatility as a gauge for exposure to equities is an intelligent way for investors to protect their assets.”
For more information on market volatility, visit our volatility category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.