Direxion's Sylvia Jablonski On Inverse & Leveraged ETFs

Direxion managing director Sylvia Jablonski is regarded as a recognized expert in the ETF industry.

Since joining Direxion in 2009, Jablonski has led the company’s sales team while focusing on global product implementation within the institutional and tactical client segment as well as promoting ETF education and strategy throughout the financial industry.

Prior to joining Direxion, Sylvia held a Delta One Sales Trading role which included ETF Asset Manager, and Institutional and Hedge Fund coverage at Societe Generale.

Before Societe Generale, Sylvia had six years of financial markets experience at Deutsche Bank where she covered Hedge Fund, Asset Management, Institutional and ETF Managers as a Swaps Flow Sales Trader/Equity Derivative Product Specialist.

She’s a graduate of Boston College where she holds a B.S. in Finance, Management and a Minor in Spanish, and a graduate of Fordham University where she holds a Masters in Finance and an MBA in Economics and Strategy.

ETF Trends spoke to Jablonski about the markets, leveraged and inverse ETFs and the current focus and direction of Direxion, the second-largest issuer of inverse and leveraged ETFs.

Can you describe Direxion’s view of the current markets and what opportunities exist for investors and traders?

In the short and medium term we anticipate a trader’s environment. The U.K. vote to leave the European Union has added to uncertainty in the markets, leading to a return to higher volatility and another drop in bond yields in a flight to perceived safety. The Brexit aftermath is a drag on the process of global economic stabilization.

An expectation of monetary easing by the world’s central banks has pushed trillions of dollars of government bonds into negative-yield territory.

An overall more steady global economy contributed to a commodities bounce back during Q2, and most assets posted decent gains for the first half of 2016.

We maintain an expectation of elevated market volatility. This uncertain environment is a risky time to be complacent, and presents opportunities for tactical investors.

How are U.S. stocks reacting post-Brexit?

Investors and traders are realizing that the consequences of the Brexit will unfold over a two to four year perios. SoU.S. equity indices have recovered and finally broken through to new record highs. But investors are still skeptical.

The U.S. economy has been improving, albeit slowly. Earnings season has been better than expected, boosting U.S. stocks. After falling during the initial news of the Brexit, the fed funds futures market shows the chances of a Fed hike at some point this year have gone up again.

Improving expectations for earnings along with better-than-expected economic data has supported stocks even as negative geopolitical events persist.

The upturn in earnings forecasts is taking place across a number of sectors.

However, growth is still very slow. Without acceleration, earnings may remain stable but are unlikely to support a more powerful rebound.

What asset classes and sectors are currently hot for trading leveraged and/or inverse ETFs?

The lackluster U.S. economy and the speculation that the Fed will postpone another interest rate hike have contributed to a depreciating U.S. dollar. Consequently, a weaker dollar makes alternative assets like gold more attractive.

Mining stocks, which are a natural leveraged play on the metal, have been some of 2016’s best-performing securities. Their rapid rise has some market observers questioning whether near-term pullbacks are likely.

Throughout the entire first half of the year, we’ve seen increasing interest in our 3x leveraged and inverse Gold Miners and Jr Gold Miners ETFs.

As economic and geopolitical events ebb and flow, so do the bets on miners.

The surprise of the year may be the energy sector. Some of the large energy companies have experienced double digit returns, even in the face of continued low oil prices.

Oil prices have moved considerably in the past two years, from over $100/barrel, to below $30, before hovering around $50 currently. Prices seem to be in balance. The question is where do prices go from here?

As we’ve already experienced, there are lots of exogenous events that could greatly affect the price of oil quickly and severely.

Some investors think that the third quarter is historically bad for the energy sector, but others still think there’s gains to be had. It’s going to be an interesting market for traders as we head into the end of the year.

Are leveraged ETFs for everyone? What are the benefits and who should be considering them?

We’ve always maintained that leveraged ETFs aren’t for all types of investors.

The nuances of intraday movement in these ETFs and the impact of seeking daily objectives are phenomena of leveraged ETF trading that have to be understood. These funds reset their asset to index exposure ratio every day, so returns for periods of greater that one trading day will not necessarily align with cumulative returns of the benchmark index they track.

It is highly recommended that traders who use these products monitor their positions often to make sure they are maintaining their desired exposure level.

For sophisticated leveraged ETF investors, can you share some strategy plays?

Efficient use of capital (portable alpha)

Using leveraged ETFs in a portable alpha strategy allows a manager to gain equity asset class exposure using a 2x or 3x ETF, essentially letting half or a third of the capital do the work, allowing the balance of capital to be redeployed for other investment and risk-management purposes, such as exposure to yield-enhancing fixed income asset classes.


Inverse ETFs may be used when seeking to hedge the market. As their name reveals, inverse ETFs go up when the market goes down, and they go down when the market goes up. Inverse ETFs allow you to seek the opposite return of specific sectors, asset classes – for instance the S&P 500, Financials, Energy and Tech.

Again, the thing to remember about these funds is that they’ll lose value so long as the market keeps going up. But the potential rewards can be attractive if the market suffers a setback.

At the very least they may serve as a hedge. It’s important to note that a -1x ETF which seeks 100% of the inverse performance of an index, is subject to daily compounding. However, basic math dictates that the compounding would be less than the compounding in a -2x or -3x leveraged ETF.

Used appropriately, even a small allocation of your capital could help make up for any losses you sustain in a market crash.

And of course, individuals should consult a financial professional before engaging in hedging activity.

Double short

The daily reset and subsequent compounding affect has led to the emergence of the double-short trade during volatile markets. This is a strategy used by traders who believe that we will experience range bound volatility. Basically, the double short strategy is executed when you construct a portfolio that shorts equal amounts of both the long leveraged ETF and the short leveraged ETF tracking the same index.

Intuitively, you might expect that the two securities would be mirror images of each other and that the sum of the cumulative returns for both securities would be 0%.

But because of the compounding affect caused by the daily reset of the funds’ exposure levels, both the long ETF and the short ETF decrease in value over volatile periods. So going short equal amounts of both results in a positive return. In addition, this trading strategy is exposed to low risk because shorting this pair of securities is market neutral.

Direxion is best known for its 3X leveraged ETF products, but the company is making moves to build out its suite of single inverse (-1X) ETFs. What is this focus all about?

Even before Britain’s vote to leave the EU, investors were grappling with a range of concerns: Slow-to-no economic growth in the U.S. and across the world, unprecedented levels of central bank stimulus overseas, negative interest rates on high-quality foreign government bonds, a painfully slow default by a U.S. territory (Puerto Rico), an extended slowdown in China, increasing terrorist activity, and let’s not forget an election cycle that has at times been downright terrifying. Yet U.S. stocks bumped up against all-time highs again this year hitting a new intraday high of 2,178 on August 1.

As managers feel compelled to prepare strategies for managing pullbacks, they’re also compelled to consider the most efficient and cost effective ways to execute those strategies. Inverse ETFs are easily accessible, liquid trading tools that allow tactically minded managers to hedge market downturns, without the need for a margin account.

Can you discuss the benefits of the products as compared to other hedging strategies?

Direxion inverse and leveraged inverse ETFs from Direxion are funds that seek to provide an inverse multiple (e.g., -1x or -2x or -3x) of the daily return of a benchmark before fees and expenses. Inverse and leveraged inverse ETFs cover a broad range of equity, fixed-income, commodity and currency benchmarks. Many investors consider inverse ETFs to be attractive hedging instruments for the following reasons:

Inverse Correlation: An inverse ETF seeks to achieve the inverse of the one-day performance (or a multiple thereof) of the ETF’s stated benchmark index before fees and expenses. So buying an inverse ETF may provide index returns with the negative correlation, on a daily basis, necessary to implement an effective hedge, without requiring investors to short securities or use derivative-based strategies.

Accessibility: Inverse and leveraged inverse ETFs trade much like stocks on security exchanges and are generally bought and sold in the same way. Unlike derivatives trading, there are no special accounts or other special arrangements are needed.

Intraday Pricing and Liquidity: Since inverse and leveraged inverse ETFs trade much like stocks, they are priced throughout the day to reflect market fluctuations. For some investors, this can make it easier for monitoring and rebalancing.

No margin account needed: Since you are essentially taking a long (owning the asset vs. borrowing an asset to sell short, as explained previously) position in a fund that provides inverse exposure, there’s no margin account needed to purchase an inverse ETF.

No chance of losing more than the initial investment: You can never lose more than your initial investment when using leveraged funds. This is in stark contrast to buying on margin or selling stocks short, a process that can cause investors to lose far more than their initial investment.

Broader diversification as compared to individual stocks: Inverse ETFs may offer a more diversified approach to hedging than shorting an individual stock. Of course if you are acting on the anticipation of news on a specific company, an ETF may not be the right trade. But if you are considering betting against a sector or asset class, inverse ETFs may be a simpler way to execute your strategy.

Able to use in retirement accounts: You can’t short stocks of any type in an IRA. The IRS doen’t allow any form of borrowing in an IRA. You can however, trade inverse ETFs.

For more information about Direxion, visit www.direxioninvestments.com.

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.