ETF Trends CEO Tom Lydon discussed the Direxion Fallen Knives ETF (NIFE) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
The Direxion Fallen Knives ETF aims to deliver a simple, systematic approach to capturing stocks that have fallen significantly, but with the financial health to support future outperformance. The idea of falling – or fallen – knives is a commonly understood one, and the rules-based approach allows for a framework to capture the most attractive opportunities. The fund may provide investors with a distinctive approach to U.S. equities with a distinct exposure profile.
NIFE is a new ETF to help investors catch the falling knife in the market. This is a colloquial term for a rapid drop in the price or value of a security. Traders try to capitalize on this quick sell-off. While a falling knife can quickly rebound in what’s known as a “whipsaw,” the security may also lose all of its value, as in the case of a bankruptcy.
The term is usually used in a negative light, or for speculators. A falling knife is generally used as a caution not to jump into a stock or other asset during a drop. People may have heard, “don’t try to catch a falling knife,” which can be translated to mean, “wait for the price to bottom out before buying it.”
A Timely Launch?
Many investors have been “bottom-fishing” but that the strategy aims to “combine underperformance with financial health.” However, NIFE is different from run-of-the-mill bottom fishing. The underlying index comprises companies that have seen significant share price declines but have solid financials, indicating the price could see a turnaround.
Investors can track investment results of the Indxx US Fallen Knives Index, which identifies companies that have experienced significant price deterioration, making them possibly poised for a price revival. While the strategy invests in stocks may be subject to some short-term controversy, it requires a disciplined, rules-based approach to separate those with likely temporary (rather than secular) business and price declines. Screening for eligible names that have both recently experienced substantial price decline, but maintained strong measures of financial health, increases the likelihood of a price rebound and offers the opportunity for a highly differentiated exposure.
Companies are scored on current ratio, cash flow coverage, and debt-to-equity ratio, with the top 50 securities selected for inclusion in the index. Measures of financial health ratios include:
- Total Current Assets / Total Current Liabilities – Shows how many times over a firm can pay its current debt obligations based on its most liquid assets.
- Net Operating Cash Flow / Total Debt – Shows a firm’s ability to pay its total debt obligations from its business operations.
- Total Debt / Total Shareholder’s Equity – Shows how much debt a firm has relative to the value of its common and preferred equity.
The ETF focuses on “short-term controversies to hopefully identify mean reversion as the strategy systematically identifies those that have fallen but have strong financial health.” NIFE is suggested as a compelling option for a satellite, or differentiated, exposure within a portfolio.
Listen to the full podcast episode on NIFE ETF:
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