Category Archives: Direxion

ETF Companies Seek Vanity Plates for Tickers

Rachel Louise Ensign wrote a funny story in the Wall Street Journal on ETF sponsors searching for memorable ticker symbols to help market their funds. Laura Morrison of the New York Stock Exchange says they’re like vanity plates on cars. But with 1,350 symbols already in use on the NYSE Arca, the biggest exchange for ETFs, and another 2,446 reserved for future products, it’s getting hard to find something catchy.

Ensign likes the literal, such as SOIL, the ticker for the Global X Fertilizers/Potash ETF, the figurative, such as DUST for the Direxion Daily Gold Miners Bear 3X Shares and the alluring, such as GGGG for the Global X Pure Gold Miners ETF.

My all-time favorite is humor, with MOO, the symbol for Market Vectors Agribusiness ETF. For literal, it’s hard to beat EGPT for Market Vectors Egypt Index ETF or CORN for the Teucrium Corn Fund. For figurative I like GULF for WisdomTree’s Middle East Dividend Fund
.

The question on whether these vanity plates help a fund’s marketing efforts ends up with a big possibly considering the Global X Farming ETF, with the ticker BARN, gets ready to shut down this month.

6 Direxion ETFs to See Reverse Splits

Direxion Shares announced it will execute reverse splits for six of its leveraged ETFs.

Five of the funds will experience a a 1-for-5 reverse split:
Direxion Daily Real Estate Bear 3x Shares (DRV)
Direxion Daily Emerging Markets Bull 3x Shares (EDC)
Direxion Daily Financial Bull 3x Shares (FAS)
Direxion Daily Latin America Bull 3x Shares (LBJ)
Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV)

The Direxion Daily Russia Bull 3x Shares (RUSL) will experience a 1-for-3 reverse split

The splits will go into effect for shareholders of record after the close of the markets on Wednesday, November 9, 2011. The shares of each ETF will be offered on a split-adjusted basis on November 10. As is the case with regular stock splits, the total market value of the shares outstanding will not be affected, except with respect to the redemption of fractional shares.

Unlike mutual funds, fractional shares of ETFs can’t be bought or sold. Thus, shareholders may redeem the fractional shares for cash at each ETF’s split-adjusted net asset value (NAV) as of November 9. These redemptions could cause a shareholder to realize a gain or loss. Otherwise, the reverse split will not result in a taxable transaction for holders of ETF shares. No transaction fee will be imposed on shareholders for such redemption.

The reverse split will result in each ETF having outstanding one aggregation of less than 50,000 shares to make a creation unit, or an “odd lot unit.” Direxion says each ETF will provide one authorized participant with a one-time opportunity to redeem the respective odd lot unit at its split-adjusted NAV, or at the NAV on such date the authorized participant seeks to redeem the odd lot unit.

9 ETFs Make Up 18% of Total U.S. Volume

Abel/Noser, an agency-only broker, released a market liquidity study for July saying ETFs dominated trading on the U.S. stock markets, with nine ETFs representing 18% of the total daily domestic volume, reports StreetInsider.com.

Those nine ETFs were: the SPDR (SPY), iShares Russell 2000 Index (IWM), PowerShares QQQ (QQQQ), iShares MSCI Emerging Markets Index (EEM), SPDR Gold Shares (GLD), UltraShort S&P500 ProShares (SDS), iShares MSCI EAFE Index (EFA), Financial Select Sector SPDR (XLF) and Direxion Daily Financial Bull 3X Shares (FAS).

According to the July ETF Report released by the National Stock Exchange today, the top five ETF providers in terms of volume, in descending order, are State Street Global Advisors, BlackRock, ProShares, Direxion and Invesco/PowerShares. Together, their share volume for the month of July was 27.6 billion shares, or 54% of the NYSE Group Volume in all stocks traded, 50.6 billion shares. This number doesn’t include Nasdaq volume.

In addition, Abel/Noser said six stocks accounted for more than 10% of the domestic principal traded. The six stocks: Apple, Bank of America, Citigroup, Microsoft, Exxon Mobil and Intel.

The top 105 stocks represented more than half of the day’s volume, says the study, while the top 975 names accounted for 90% of all the volume. The renaming 17,399 securities accounted for just 10% of the daily volume on the market. These numbers were little changed from June.

New ETFs Leverage Natural Gas, Retail Sectors

If you want to leverage a bet on natural gas or the retail sector, Direxion’s new ETFs will help you achieve that goal. On Wednesday, the Boston firm launched four new new leveraged ETFs, bringing its total to 38.

The Direxion Daily Natural Gas Related Bull 2X Shares (FCGL) seeks to produce 200% of the daily performance of the ISE-REVERE Natural Gas Index. The index tracks companies that derive a substantial portion of their revenues from the exploration and production of natural gas. Oil and gas exploration and production make up 72.1% of the index, while integrated oil and gas comprise 24.3%, with 3.5% in gas utilities. The Direxion Daily Natural Gas Related Bear 2X Shares (FCGS) seeks to produce twice the inverse return of the index.

The Direxion Daily Retail Bull 2X Shares (RETL) seeks to double the returns of the Russell 1000 RGS Retail Index, while the Direxion Daily Retail Bear 2X Shares (RETS) gives negative 200% return of the same index. The Russell 1000 RGS Retail Index contains constituents of the Russell 1000 Index that are classified within the Retail subsector of the Russell Global Sector Scheme.

The funds all have an expense ratio of 0.95%.

Direxion Reverse Split Hits Tomorrow

Direxion, a provider of inverse and leveraged ETFs, will execute a 1-for-5 reverse split on four of its funds Wednesday, July 7.

  • Direxion Daily Energy Bear 3x Shares (ERY)
  • Direxion Daily Real Estate Bear 3x Shares (DRV)
  • Direxion Daily Small Cap Bear 3x Shares (TZA)
  • Direxion Daily Technology Bear 3x Shares (TYP)

This will reduce the number of shares outstanding in each fund by about 80%. The net asset value, or NAV, of each ETF share will increase 5-fold when markets open July 8.

This means if a shareholder owns five shares at the close of trading tomorrow, he will wake up with one share on Thursday. However, just like any split, the total market value of the shares will remain the same. For example, if before the split you own 100 shares at $5 for a total investment of $500, after the split you will have 20 shares priced at $25 apiece, for a total investment of $500. This may result in shareholders holding fractions of a share. Unlike mutual funds, ETFs can’t hold fractional shares, so investors will receive cash for any fractional share amount. This cash redemption may result in a gain or loss.

Direxion says, “Leveraged ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged investment results and intend to actively monitor and manage their investments. Leverage ETFs are not designed to track the underlying index over a longer period of time.”

Goldman Talks About Rydex Closing 12 Funds

Rydex|SGI announced last Friday that it will close 12 of its 14 leveraged and inverse ETFs. Inverse ETFs essentially short an index and try to earn the negative return of the index it tracks. Leveraged ETFs seek to provide 200% or 300% of an index’s daily return or negative return.

“The premium reason is they hadn’t garnered a significant amount of investor interest,” said Richard Goldman, the chief executive officer of Rydex|SGI, in an interview with ETFsForTheLongRun. “It was a small percentage of the ETF assets under management.”

Including the affected funds, the Rockville, Md., firm offers a lineup of 40 exchange traded products (ETPs). The 12 funds held approximately $129 million in assets, or less than 2% of Rydex|SGI’s total $7 billion in ETF assets under management. Typically, an ETF needs $50 million in assets to remain viable. The ETP division represents 29% of Rydex’s total $24 billion under management. Closing these funds will allow Rydex to focus resources on the products with the most demand.

The consolidation is a bit of an ego bruise for Rydex as it invented the leveraged and inverse mutual fund. Even though Rydex was an early entrant in the ETF market, launching its first fund in 2003, Goldman acknowledged it had lost the first mover advantage on the inverse and leveraged funds. Because ETFs are sold on the stock exchange and not through financial advisors like mutual funds, there’s little need for replicating another fund’s strategy. Thus the first fund to track a market typically garners the most name recognition and hence, assets. ProShares, the market leader, launched its first inverse and leveraged ETFs in 2006. Direxion is the other main player in this space.

“I won’t say universally we’re getting out of the leveraged and inverse business,” said Goldman. “We leaving options open and won’t constrain ourselves to not participate in that space. The overall leveraged ETF business is still strong and there’s not a lot of degredation in the asset base.”

Goldman said that Rydex’s recent purchase by Guggenheim Partners had nothing to do with the closing of the funds, or problems at the firm. He said almost all the Rydex products had strong positive net inflows in 2009 and that total ETP assets grew about 30%. Rydex mutual funds also saw net cash inflows for the year, with tremendous growth in alternative investment strategies packaged as mutual funds, fundamental alpha strategies and fixed income formats.

The CEO added that he doesn’t believe Guggenheim has plans to merge Rydex with Claymore, the ETF firm Guggenheim bought last year. “We’re committed to growing our franchise and it’s an important growing piece of the business.”

Friday, May 21, will be the last day of trading on NYSE Arca for the following 12 funds.

Rydex 2x Russell 2000 ETF (RRY)
Rydex 2x S&P MidCap 400 ETF (RMM)
Rydex Inverse 2x Russell 2000 ETF (RRZ)
Rydex Inverse 2x S&P MidCap 400 ETF (RMS)
Rydex 2x S&P Select Sector Energy ETF (REA)
Rydex 2x S&P Select Sector Financial ETF (RFL)
Rydex 2x S&P Select Sector Health Care ETF (RHM)
Rydex 2x S&P Select Sector Technology ETF (RTG)
Rydex Inverse 2x Select Sector Energy ETF (REC)
Rydex Inverse 2x Select Sector Financial ETF (RFN)
Rydex Inverse 2x Select Sector Health Care ETF (RHO)
Rydex Inverse 2x Select Sector Technology ETF (RTW)

Between the close of trading on May 21, and May 28, the affected funds will liquidate their portfolio assets. Shares still held on May 28 will be redeemed automatically. Investors will receive a cash distribution equal to the net asset value of their shares as of the close of trading May 28. This amount includes any accrued capital gains and dividends, minus the costs to close the fund.

Pressure on Gold May be Buying Opportunity

The Goldman story is affecting gold according to 24/7 Wall Street. On Friday, the SPDR Gold Shares (GLD) lost 2.1% to $111.24. The guys at 24/7 reason that the Paulson & Co. hedge fund implicated in the scandal is heavily invested in gold. However, if investors pull out, the fund may need to sell gold to cash them out, putting downward pressure on the yellow metal. I think this is argument is a nonstarter. Most hedge funds require 60 to 90 days notice before investors can cash out. So, this sell off won’t happen for a while. This means, that gold may have been beaten down without good reason, and that Monday is a buying opportunity.

Meanwhile, The New York Times said on Saturday that Wall Street firms tent to settle cases like this one, but Goldman’s statement on Friday that it intends to fight may create a big problem. While the refusal to settle was intended to discourage investor lawsuits, this could set Goldman up for a long, messy public battle. The paper added that several European banks that lost money in the deal may try to recoup the money from Goldman.

Then Sunday, the Times added two congressmen want a deeper investigation into taxpayer losses while Britain’s prime minister asked his country’s securities regulator to investigate the Goldman due to losses incurred by the Royal Bank of Scotland. Germany added it may take legal action as well.

It appears Yahoo!Finance had it wrong. They didn’t even mention the volume of the Financial Select Sector SPDR (XLF) which was the third most traded stock on Friday with 380.6 million shares traded, topping the SPDR (SPY) and Direxion Daily Financial Bear 3x (FAZ), which it said had the third highest volume. On Friday, XLF fell 3.7% to $16.36 and the ProShares Ultra Financials (UYG), the one that gives 2x the positive return on the financial sector, lost 6.6% to $71.65.

Big ETF Moves on Goldman News

Exciting day on Wall Street as the Securities and Exchange Commission sends a shot across the bow of Goldman Sachs.

The stock market started out mildly higher, when midmorning, the SEC charged Wall Street’s most influential bank with fraud over its marketing of a subprime mortgage product designed to fail. The SEC says a Goldman vice president was also charged with fraud for his responsibility for creating the questionable mortgage product, known as ABACUS. Surprisingly, criminal charges were not filed.

However, this makes many question whether the bull run of the last year is over.

According to Reuters, the SEC alleged that Goldman structured and marketed ABACUS, a synthetic collateralized debt obligation that hinged on the performance of subprime residential mortgage-backed securities. However, Goldman allegedly didn’t tell investors “vital information” about ABACUS, including that the hedge fund Paulson & Co helped choose the securities in the portfolio. Run by John Paulson, the hedge fund made billions of dollars betting that the housing market would crash. The SEC also alleged that Paulson took a short position against the CDO in a bet that its value would fall, reported Reuters. “This included an estimated $1 billion from the transaction detailed in the SEC lawsuit, which the agency said cost other investors more than $1 billion,” said Reuters.

Many people on Wall Street have said this is a politically motivated moved as Congress begins debating reform of financial industry regulation.

Goldman denied the charges. Its stock fell $23.57, or 12.8%, to $160.70, and it brought down the entire market with the Dow Jones Industrial Average losing 126 points, or 1.1% to 11018.66. The S&P 500 dropped 19.5 points, or 1.6%, to 1192.13.

Obviously, this means a lot of movement among ETFs.

The Direxion Daily Financial Bear 3x (FAZ) jumped $1.14, or 10.3%, to $12.18, posting the third-largest volume of the market gainers, 209.7 million shares.

ProShares UltraShort S&P 500 (SDS) gained 94 cents, or 3.3%, to $29.72.

ProShares UltraShort Financials (SKF) jumped $1.15, or 6.8%, to $18.11.

The Financials Select Sector SPDR (XLF) fell 62 cents, or 3.7%, to $16.36.

Hougan Calls Out Vanguard on Transparency

Matt Hougan of IndexUniverse.com recently wrote that ETFs Are Not Really Transparent. He calls out ProShares and Vanguard as the worst offenders, although the accusations against Vanguard are much worse. ProShares lack of transparency is more a matter of degrees, while Vanguard pretty much gives investors a poke in the eye.

In fact, Hougan says ETF firms are lying when they say they’re “fully transparent.” It’s a pretty scandalous statement to make about the ETF industry. Transparency is part of the mantra ETF providers chant when trying to convince investors to abandon mutual funds for their products. For those who haven’t heard the mantra it goes something like this: “ETFs are better than mutual funds because they’re cheaper, more tax-efficient, more flexible and more transparent.”

This famed transparency is a direct result of the creation unit process in which the Authorized Participants receive ETF shares directly from the firm. The creation process is what’s known as an in-kind trade. The AP buys a basket of all the securities in the ETF portfolio and trades them for an equal number of ETF shares, which it then sells on the stock exchange. For instance, trading all 500 stocks in the S&P 500 Index for shares of the SPDR (SPY). In order for the AP to buy the correct basket, the ETF needs to publish its portfolio every night. This compares to the mutual fund, which only needs to publish its portfolio every three months.

Hougan says there’s “actually no rule requiring index-based ETFs to disclose their portfolios any more frequently than traditional mutual funds. And for many ETFs, portfolio disclosure is either incomplete or significantly delayed. And the problem is getting worse.”

ETF firms do say if you can’t find the portfolio listings then look at the index. But many ETFs optimize their portfolios, because some securities are so illiquid or small that if the ETF purchased them it would significantly affect the market. So they don’t hold the exact same holdings as the index. This can create a disparity between the index return and the ETF’s return, a situation called tracking error. He adds that some portfolios and creation units differ too, though I lost him on this part.

Still, it’s a bit of a head fake, because as Hougan admits, almost all ETF families do provide the entire portfolios of their ETFs on a daily basis on their Web sites. He also acknowledges that almost all ETF creation units can be found on Bloomberg or if you directly contact the ETF sponsor. However, that’s not great for retail investors without an expensive Bloomberg machine.

However a few firms are taking advantage of the right to not disclose. Hougan calls ProShares a worse case scenario. For most of its short and leveraged funds, ProShares uses equity swaps to achieve their daily return. The swaps and their amounts are listed, but not the counter parties who hold the swaps. This becomes an issue if the counter party can’t fulfill its obligation, which happened in 2008. Lehman Brothers held some swaps for ProShares on the day it went bankrupt, causing problems with the portfolio. However, transparency is a big issue within the entire swaps market, so this might not necessarily be ProShares fault. Rydex SGI and Direxion (click on direct holdings), which also sell short and leveraged funds, list the swaps but not the counter parties.

Most surprising is Vanguard, which Hougan calls the worst offender even as it promotes transparency of holdings on its sites, but only gives them out every three months, like their mutual funds. The latest being Dec. 31, 2009. I’m surprised by this because Vanguard is definitely the ethical standard by which to measure mutual funds. So I figured they would be on the forefront with ETFs.

Ironically, Hougan points out the actively managed ETFs must be totally transparent every day, sort of beating the index ETFs at their own game.

While the few exceptions are troubling, overall I think the window on transparency remains pretty clear, especially considering the alternatives, mutual and especially hedge funds, where you hardly ever know what you own.

For Those Who Need to Amp Up the BRIC Risk

As if India and the emerging economies known as the BRIC, Brazil, Russia, India and China, didn’t have enough risk, leveraged ETF house Direxion launched on Friday six new Bull and Bear funds to track India, all four BRIC countries, and the U.S. semiconductor industry. Direxion says these are the first leveraged ETFs to track India and the BRIC countries.

The Direxion Daily BRIC Bull 2x Shares (BRIL) and Direxion Daily BRIC Bear 2x Shares (BRIS) track the BNY Mellon BRIC Select ADR Index. This index holds a select group of American depositary receipts from stocks that are listed in Brazil, Russia, India and China. Each fund either returns twice the daily performance of its tracking index, or twice the negative daily return of the index.

The Direxion Daily India Bull 2x Shares (INDL) and the Direxion Daily India Bear 2x Shares (INDZ) track the Indus India Index, which represents the whole Indian equity market. The index holds the 200 largest companies listed on India’s National Stock Exchange and the largest 200 companies listed on the Bombay Stock Exchange. INDL returns twice the daily return of its tracking index, while INDZ twice the negative daily return of the index.

The premier index for tracking the U.S. semiconductor industry is the Philadelphia Exchange Semiconductor Sector Index, which is known by its ticker, and called the SOX. The Direxion Daily Semiconductor Bull 3x Shares (SOXL) gives 300% of the daily move on the index while Direxion Daily Semiconductor Bear 3x Shares (SOXS) gives a negative 300%.

The funds lift the total number of leveraged ETFs offered by Direxion to thirty-four.