Direxion Shares Discussion Topics

Topic 1 - Who are the appropriate users of leveraged ETFs?

Synopsis: Direxion Shares are definitely NOT for everyone. These funds are unusual in that they seek a daily investment objective, which may not align with most investors that invest with a much longer term outlook. Direxion Shares also provide leveraged investment results, which builds in added volatility and risk, and the Bear funds move in the opposite direction of the benchmark index they track (in addition to using leveraged investment techniques and seeking daily goals). Each of these characteristics serve to differentiate Direxion Shares from traditional mutual funds and ETFs, and these characteristics may also make them inappropriate for many investors. Every fund family will suggest it, but in the case of Direxion Shares you really should read the Prospectus carefully to understand the risks and educate yourself before you invest.

Highlighted Article

Article Title: Warning Leveraged and Inverse ETFs Kill Portfolios
Publication: Morningstar.com
Date Published: January 23, 2009
Reporter: Paul Justice, CFA
URL: http://news.morningstar.com/articlenet/article.aspx?id=271892&pgid=rss

Direxion's Perspective:

Mr. Justice states that leveraged ETFs are only well suited for less than 1% of investors. While we are uncertain of the math that led to this conclusion, we definitely agree that Direxion Shares should be used by only a small percentage of investors. As evidenced by this website and other materials that we have published, we are very vocal about this point. We do not want investors purchasing our funds unless they fully understand them and have developed a well thought out strategy to trade them. They are for sophisticated investors that are willing to accept significant short term losses, understand fully the performance characteristics of leveraged funds that seek daily objectives, and that have the time and capacity to actively manage their portfolio.

Within this article Mr. Justice also talks a great deal about the actual long term performance of leveraged ETFs over time. We address this issue in Topic 2.

Related Articles

Article Title: Leveraged ETFs-Portfolio Salvation or Damnation
Source: Tradingmarkets.com
Date Published: December 23, 2008
Reporter: David Goodboy
URL: http://www.tradingmarkets.com/.site/etfs/commentary/etfs/Levered-ETFs---Portfolio-Salvation-or-Damnation-79629.cfm

Article Title: New Direxion Triple Leverage Funds: Proceed with Caution
Source: Seeking Alpha
Date Published: November 5, 2008
Reporter: Tom Lydon
URL: http://seekingalpha.com/article/104242-new-direxion-triple-leverage-funds-proceed-with-caution

Article Title: Plop-Plop, Fizz-Fizz - Can You Handle Short and Leveraged ETFs?
Source: ETF Trends
Date Published: April 8, 2008
Reporter: Tom Lydon
URL: http://www.etftrends.com/2008/04/volatility-show.html

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Topic 2 - What is the deal with the performance of leveraged ETFs for periods longer than a day?

Synopsis: Leveraged ETFs do not provide returns consistent with their daily targets over time. These funds have daily investment objectives and their returns through time are enormously dependant on the performance path of the underlying index, often times even more so than the total return for the period.

The return of a fund for a period longer than a day may bear little relationship to the product of (a) the return of the benchmark for the relevant period and (b) the stated degree of the Fund’s magnification. In other words, if the Russell 1000 gains 5% in a given month, an investor should not expect the Direxion Large Cap Bull 3X Shares to gain 15% or the Large Cap Bear 3x Shares to decline by 15%.

In periods of market volatility – when the market is moving up and down but not trending – the return of the ETFs will almost always be worse than the cumulative return of the index multiplied by three. In essence, these Funds are sprinters – they are not middle distance runners and they are certainly not marathoners. Investors who are looking for long term returns should look elsewhere.

Highlighted Article

Article Title: Leveraged ETFs-May Not Perform the Way You Think
Source: Morningstar.ca
Date Published: December 18, 2008
Reporter: Esko Mikels/Al Kellett
URL: http://www.morningstar.ca/globalhome/Industry/News.asp?Articleid=ArticleID12920081521

Direxion's Perspective:

Mr. Mikels and Mr. Kellet have done an excellent job of pointing out several key issues related to leveraged ETFs. The most important point outlined in this article and that investors should understand before investing in leveraged ETFs is that they have daily investment objectives. Many investors default to the belief that their objective should carry over to longer periods of time – hence the title of this article.

Investors typically judge the performance of a security based on its return for their particular holding period. Many investors hold leveraged ETFs for a period of one day, or even less, which means that their use of the funds squares well with the fund's objective. However, investors who choose to hold the funds for periods longer than one day should recognize that their holding period does not square with the fund's objective and such investors should regularly monitor and adjust their position to harness the daily objectives of the funds for their longer holding period.

It should be understood that most leveraged funds do typically track very closely to their daily objective, and if in fact they do, it would be a contradiction in terms to say that the funds do not meet their investment objective over time.

Related Articles

Article Title: Why You Need to Be Careful with Leveraged ETFs
Source: Seeking Alpha
Date Published: December 24, 2008
Reporter: Matthew McCall
URL: http://seekingalpha.com/article/112167-why-you-need-to-be-careful-with-leveraged-etfs

Article Title: ETF Math Lesson: Leverage Can Produce Unexpected Returns
Source: The Wall Street Journal (Subscription may be necessary)
Date Published: January 4, 2009
Reporter: Tom Lauricella
URL: http://online.wsj.com/article/SB123111094917552317.html

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