Direxion Expands Exposure to Emerging Markets

At a time when emerging markets continue to draw assets and attention, Direxion Funds, an ETF provider known for its offering of leveraged and inverse products, announced the addition of four new ETFs providing investors with a way to implement similar strategies when investing in China and Latin America.

The new ETFs are leveraged bull and bear indexes which seek to replicate 300% of the daily performance, or 300% of the inverse daily performance, of the BNY China Select ADR Index and the S&P Latin America 40 Index.

The first of the ETFs is the Direxion Daily China Bull 3X Shrs (CZM), which aims to gain 300% of the daily performance of the BNY China Select ADR Index.  The BNY China Select ADR Index tracks select Depository Receipts of China-based companies which are traded on U.S. exchanges.  The second ETF is the Direxion Daily Latin America 3X Bull Shrs (LBJ) which aims to gain 300% of the daily performance of the S&P Latin America 40 Index, which measures the performance of large-cap companies from Latin America.  Similar to their domestic offerings, Direxion also will launch bear funds for both indexes, which will aim to give 300% of the inverse daily performance of those indexes.

In leveraged long ETFs offered by Direxion, roughly 80% of the asset value is invested in an “optimized” basket of securities as a proxy for the tracked index and represents a corresponding fraction of the ETF’s total return.  Remaining capital is invested in very short-term bond instruments which are used to collateralize derivative positions (over-the-counter total return swaps) which provide the remaining roughly 220% exposure for a 3x leveraged long ETF.  Direxion’s leveraged inverse ETFs gain exposure entirely through swap agreements, with the fund’s capital fully deployed in very short-term bond holdings which generate income and serve as collateral for swaps positions.  Swap providers typically gain exposure by way of futures and options positions.

While not for most individual investors, leveraged and inverse ETFs make up 5-7% of all ETF assets.  An important thing to remember is that these ETFs need to be monitored on a daily basis.  The goal of the funds is to return the daily return of an index, so the implications of compounding can have a dramatic impact on investor returns over longer time horizons.