With tactical ETF strategies, investors can lightly leverage their position to potentially enhance market exposure and returns.
“It’s been exceedingly difficult for advisors to outperform the market, so I think a lot of them are just basically saying, ‘if you can’t beat them, join them,’ and I mean in the form of buying a lot more passive ETFs,” Andy O’Rourke, Managing Director and Chief Marketing Officer for Direxion Investments, said at the Charles Schwab Impact Conference.
This has been another record year for the ETF industry as investors funneled $468.6 billion in new money into U.S.-listed ETFs, with most investors focusing on passive index-based products.
In an environment where financial advisors are trying to differentiate themselves from the competition, money managers will utilize various tactical tools to ride market waves or hedge potential pitfalls.
“In this world where many of the advisors are buying the same passive ETFs, how do you from a portfolio management standpoint outperform? So I think really the key is asset allocation – finding the right asset allocation – to apply those passive ETFs,” O’Rourke said.
Additionally, when considering asset allocation, Direxion now offers a lightly leveraged ETF that “allows them to get a little more push out of their portfolio,” according to O’Rourke. These slightly leveraged strategies may help advisors and investors to slightly outperform the market during upturns.
Specifically, the Direxion Daily S&P 500 Bull 1.25 Shares (NYSEArca: LLSP) and Direxion Daily Small Cap Bull 1.25X Shares (NYSEArca: LLSC) are leveraged to the tune of 1.25, not the double or triple leverage investors have become accustomed to. Additionally, the 1.25x ETFs offer advantages, including a significant reduction in the negative effects of daily compounding over longer periods, allowing for longer holding periods for the investor.
Direxion’s lightly leveraged ETFs have the potential to offer significant outperformance of their non-leveraged counterparts. Back-tested results provided to ETF Trends by the issuer confirm as much. Dating back to the first quarter of 1995, a 1.25 times leveraged version of the S&P 500 has outperformed the non-leveraged equivalent by almost 40 basis points per quarter, according to Direxion data.
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