With the VIX (Volatility Index) plunging to new recent lows today with a low $12 handle, it makes sense to readdress a fund that often flies under the radar from Direxion known as VSPY (Direxion S&P 500 Volatility Response Shares, Expense Ratio 0.45%).
VSPY debuted in January of 2012 and remains notionally small with about $33 million in assets under management while averaging only about 3,300 shares traded daily, but in the context of Volatility in the marketplace, it is an interesting fund nonetheless to permanently have on the radar due to the way it is constructed.
VSPY tracks the S&P 500 Dynamic Rebalancing Risk Control Index, and according to fund literature “follows a quantitative rules-based equity index that seeks to mitigate risk by dynamically changing total equity exposure based on volatility signals.”
Furthermore, Direxion states that “the strategy reallocates exposure between equities and U.S. Treasury Bills based on recent volatility levels of the S&P 500 Index” while it “employs a downside risk mitigation strategy during periods of higher volatility and increases equity exposure when appropriate.”
While most would agree that the VIX itself is a poor measure of what is actually going on in terms of “Volatility” in the marketplace and ETPs that invest in VIX futures tend to have a host of issues among themselves in terms of performance eroding contango for example, perhaps alternate ways of monitoring volatility changes and moreover adjusting equity and fixed income exposure around such changes when appropriate, and in an dynamic sense, like VSPY are rather timely at this juncture given the state of the markets.
In speaking with a representative from Direxion recently, we learned that “VSPY is a great tool for investors looking to participate in the upside performance of the S&P 500, while protecting their portfolios in choppy
market environments.
The strategy responds to the volatility of the S&P 500 Index by employing a downside risk mitigation strategy. We essentially increase exposure to equities in low vol environments, and allocate to T-bills. The fund responds and rebalances when and as often as the vol level passes the methodology’s target parameters, as well as at month end.
Many investors have sat on the sidelines for too long after ’08, and didn’t participate as much as they may have liked in the S&P 500 rally of past years. An ETF like VSPY allows more conservative investors who aren’t sure where the S&P and the market is going to participate in upside equity performance, but rest assured that in volatile market environments, their investments are safely allocated back to cash.”
Direxion S&P 500 RC Volatility Response Shares
For more information on Street One ETF market commentary and ETF trade execution/liquidity services, contact Paul Weisbruch at pweisbruch@streetonefinancial.com
Street One Financial is an educational/research firm utilizing the Broker Dealer services of Precision Securities, a FINRA registered Broker/Dealer.