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2020 Year End Commodity Recap.

January 19, 2021

COM ETF Outshines Peers in 2020

The Auspice Broad Commodity Index (ABCERI) was one of the lone bright spots in the commodities category in 2020 as it finished the year up over 6 percent.  This was in sharp contrast to other notable passive commodity benchmarks that all finished negative for 2020. The ability of the strategy to be tactical in nature by getting defensive and going to cash with an individual commodity allocation when showing a downward price trend proved to be prudent. 

The Direxion Auspice Broad Commodity Strategy ETF (symbol COM) which seeks to track the rules based index of the ABCERI had very few Long positions (was mostly in cash), in the second quarter of the year, which enabled it to avoid some of the major declines that occurred with other commodity indices, particularly in the Energy and Agricultural sectors.

Overall the commodity markets in 2020 showed some resiliency after a rough start to the calendar year. The onset of the COVID pandemic led a majority of the commodity markets to exhibit downward pressure in the first few months of the year. Despite a strong rebound in the second half, the notable passive broad commodity benchmarks were not able to overcome the rough start as all finished negative in 2020. The major commodity indices finished down ranging anywhere from -3.0% to -24% in for the year. The benchmarks with the highest exposure to energy suffered the largest losses.

Most commodities in the first half of 2020 were adversely hit by the COVID pandemic, as the shutdown of the global economy created a demand scarcity in most individual commodities pushing prices down.  The exceptions were the precious metals (specifically gold), where the flight-to-safety** trade was prevalent.

In the second half of the year, optimism about the reopening of the global economy and hopes of a vaccine started to move commodity markets higher. 

The commodity sector that represented the biggest gain for COM in 2020, was agricultural. Corn and soybeans led the way with the majority of those gains achieved in Q4. Grain markets have been a performance laggard for a number of years, but the combination of an anticipated global recovery, China increasing their imports, and weather-related conditions impacting crop prospects; pushed grains to roughly their highest levels in over 6 years.

The metals complex produced some significant gains for the strategy as well, with all three metals (gold, silver, and copper) showing a positive return for the year. Silver and copper provided the biggest boost as lack of demand created earlier in the year by the pandemic, gave way to supply concerns and global industrial demand started to resurface. Gold had its best year in a decade as the flight-to-safety mantra really never dissipated throughout 2020, as a number of factors (including COVID-19, U.S. Presidential election, weaker U.S. Dollar, and global stimulus) kept a bid for gold.      

The energy markets rallied significantly off its lows, but still the complex performed poorly overall in 2020. Crude oil and gasoline accounted for the biggest losses within COM.  The shortfalls in the energy sector were drastically mitigated in the fund, as there was no exposure to these markets for a number of months. Energy markets were significantly impacted by the slowdown of demand created by COVID-19 and if OPEC+ didn’t take aggressive measures by cutting supply significantly, the damage might have been worse for the energy complex. There has been a strong rebound energy as crude oil recently crossed over $50 per barrel once again.  

As we enter 2021, the overall outlook for commodities seems to be the best environment that it has had in quite some time. The new administration agenda appears to be aligned with potentially higher commodity prices as sizable stimulus and infrastructure spending seems to be their top priorities, and with the control of the Senate, this agenda has become more feasible.

In addition, the continued weakness in the U.S. Dollar, along with interest rates starting to move higher, has created the possibility of reflation, which would bode well for this asset class.

Last, commodities continue to be trading at historically low levels relative to U.S. equities, creating an opportunity to invest in an asset class that provides additional diversification within your portfolio, as well as having the ability to behave differently than stocks and bonds.

COM continued to outshine its peers  as it approached a 4-year track record and holds an overall 5-star Morningstar rating within the Broad Commodity category, while also exhibiting high marks for its risk metrics.  

 Out of 101 US Fund Commodities Broad Basket funds based on risk adjusted returns as of 9/30/2020

The Fund’s adviser, Rafferty Asset Management, LLC (“Rafferty”) has entered into an Operating Services Agreement with the Fund. Under this Operating Services Agreement, Rafferty has contractually agreed to pay all expenses of the Fund as long as it is the advisor of the Fund other than the following: management fees, Rule 12b-1 distribution and/or service fees, taxes, swap financing and related costs, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization, acquired fund fees and expenses, and extraordinary expenses. If these expenses were included, the expense ratio would be higher.

For the most recent month-end and standardized performance click here.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized.

Short-term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. Because of ongoing market volatility, fund performance may be subject to substantial short-term changes. For additional information, see the fund’s prospectus.

** Flight to Safety is a term for the financial market phenomenon occurring when investors sell what they perceive to be higher-risk investments and purchase safer investments, such as gold and other precious metals.

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-301-9214 or visit our website at A Fund’s prospectus and summary prospectus should be read carefully before investing.

Market Disruptions Resulting from COVID-19. The outbreak of COVID-19 has negatively affected the worldwide economy, individual countries, individual companies and the market in general. The future impact of COVID-19 is currently unknown, and it may exacerbate other risks that apply to the Fund.

CUSIP Identifiers have been provided by CUSIP Global Services, managed on behalf of the American Bankers Association by Standard and Poor’s Financial Services, LLC, and are not for use or dissemination in any manner that would serve as a substitute for a CUSIP service. The CUSIP Database, ©2011 American Bankers Association. “CUSIP” is a registered trademark of the American Bankers Association.

Shares of the Direxion Shares are bought and sold at market price (not NAV) and are not individually redeemed from a Fund. Market Price returns are based upon the midpoint of the bid/ask spread at 4:00 pm EST (when NAV is normally calculated) and do not represent the returns you would receive if you traded shares at other times. Brokerage commissions will reduce returns. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Some performance results reflect expense reimbursements or recoupments and fee waivers in effect during certain periods shown. Absent these reimbursements or recoupments and fee waivers, results would have been less favorable.

The Fund is an actively managed ETF that does not seek to replicate the performance of a specified index and is not required to invest in the specific components of its benchmark index. Investing in the Fund may be more volatile than investing in broadly diversified funds. The Fund is not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and intend to actively monitor and manage their investment.

Direxion Shares Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with concentration that results from the Fund’s investments in a particular industry, sector, or geographic region which can result in increased volatility. The Fund’s use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of the Fund include risks related to investment in commodity-linked derivatives and commodities, Futures Strategy Risk, Leverage Risk, Market Risk, Market Disruption Risk, Counterparty Risk, Cash Transaction Risk, Subsidiary Investment Risk, Interest Rate Risk, and Tax Risk. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.

Exchange-traded commodity futures contracts generally are volatile and are not suitable for all investors. The value of a commodity-linked derivative investment typically is based upon the price movements of a physical commodity and may be affected by changes in overall market movements, volatility of the index, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, embargoes, tariffs and international economic, political and regulatory developments. Commodity-linked derivatives also may be subject to credit and interest rate risks that in general affect the value of debt securities. The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with directly investing in securities or other investments.

Risks associated with the use of futures contracts are (a) the imperfect correlation between the change in market value of the instruments held by the Fund and the price of the futures contract; (b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the Adviser’s inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; (e) the possibility that the counterparty will default in the performance of its obligations; and (f) if the Fund has insufficient cash, it may have to sell securities or financial instruments from its portfolio to meet daily variation margin requirements, which may lead to the Fund selling securities or financial instruments at a time when it may be disadvantageous to do so.

©2020 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Morningstar RatingTM for funds, or “star rating”, is calculated for managed with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. The Direxion Auspice Broad Commodity Strategy ETF (COM) was rated against the following numbers of US Fund Commodities Broad Basket funds: 100 funds in the last three years. As of 12/31/2020, the fund received a 5-Star rating for the 3-year period and overall. Past performance is no guarantee of future results.

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