Direxion Defined Income Boost ETFs Frequently Asked Questions
What are the Defined Income Boost ETFs?
The Direxion Defined Income Boost ETFs are a suite of single-stock options income funds. Each fund holds a single high-implied-volatility stock and systematically sells weekly call options on that stock to generate income, which it distributes to shareholders twice a month. Each fund follows a published, rules-based methodology based on the Cboe Defined Income Index series, administered by Cboe. The suite is built for investors who want income from the kinds of companies they already follow.
How do the funds generate income?
Each fund owns shares of a single stock and sells a call option on that stock each week. The buyer of the option pays the fund a premium for the right to buy the shares at a set price, called the strike price. That premium is the income, and the fund keeps it whether or not the option is ever exercised. Because the fund already owns the shares behind the call, the position is a covered call. The premium the fund collects is the source of its distributions.
What does the fund give up to generate that income?
In exchange for the premium, the fund accepts a ceiling on its gains. If the stock stays flat, falls, or rises only modestly, the fund keeps the premium and its shares. If the stock climbs above the strike price, the fund still keeps the premium, but its gain on the shares stops at the strike, and it gives up the appreciation above that level. Income up front in exchange for a limit on the upside is the central tradeoff of every options income strategy.
What is the income target for Direxion Defined Income Boost ETFs?
All of the funds in the Defined Income Boost ETF suite target a 20% annualized distribution rate. The target is set at a level the strategy aims to fund from the option premium it collects rather than from principal, which is what lets the distributions stay consistent over time. Premiums do rise and fall with the volatility of the underlying stock so income will vary and distributions are not guaranteed.
Why single high-volatility stocks?
The size of an option premium depends on how much a stock is expected to move. The more movement the market expects, the more buyers will pay for the option, and the more premium the fund can collect. High-implied-volatility single stocks tend to produce the largest premiums, which is why the suite is built on them. The same volatility that produces a larger premium also makes the underlying stock a more volatile holding, so the income and the risk rise together.
How is risk managed?
This is where the Defined Income Boost structure differs from many income strategies. Rather than selling a call and holding a fixed position until expiration, each fund manages its exposure every trading day. The fund adjusts how much of the underlying stock it holds based on the option's delta, a measure of how closely the option's price tracks the stock. If a position moves far enough against the strategy, specifically when the call's delta reaches 0.85, the fund automatically closes the options position and moves to cash until the next weekly roll. The risk management is defined by the index methodology and applied daily, rather than left to discretion.
Where does the income come from?
The income comes from the option premium the fund collects each week, sized to a defined income framework in the index methodology. As with many funds in this category, a distribution can include return of capital, which this quick educational explainer on return of capital goes through. It is also worth separating a distribution rate from total return. A high distribution rate alone does not tell you how an investment performed, because the share price can move independently of what the fund pays out.
How do Income Boost ETFs compare to other Direxion products?
Direxion's leveraged and inverse ETFs, including the single-stock leveraged and inverse funds, are built for short-term tactical trading and seek a daily multiple of a stock's return. The Defined Income Boost ETFs have a different objective. They are income products designed to generate and distribute option premium over time, rather than to deliver a multiple of daily performance. An investor following a single name might use a leveraged or inverse fund to trade a short-term view and a Defined Income Boost fund to seek income from that same name. They are different tools for different objectives.
Who are these funds for, and what should investors understand before investing?
The Defined Income Boost ETFs are designed for income-seeking investors who want exposure to a single high-volatility stock through an income objective and who understand the tradeoffs involved. Several points are worth understanding first. The funds cap their gains above the strike price. They do not protect against a decline in the underlying stock, and the fund bears that downside like any shareholder. Distributions are not guaranteed and can change over time. A single-stock focus carries more concentration risk than a diversified fund. And as with any options strategy, the value of the fund can fluctuate. These are considerations to weigh against an investor's own goals.
Direxion does not offer and endorse options trading.
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 866-476-7523 or visit our website at direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.
Investing in a Fund is not equivalent to investing directly in the underlying stock. An underlying index’s use of options contracts involves investment strategies and risks different from those associated with ordinary portfolio securities transactions. Each Fund intends to make distributions twice a month that generally reflect the income and gains generated from the underlying index’s options strategy. The occurrence and amount of any such distributions depend on the performance of the underlying security relative to the options sold and are not guaranteed.
Direxion ETF Risks- An investment in each Fund involves risk, including the possible loss of principal. Each 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. Each Fund’s use of derivatives such as futures contracts, options and swaps is subject to market risks that may cause their price to fluctuate over time. Risks of the Funds include, but are not limited to, Index Correlation Risk, Derivatives Risk, Options Contracts Risk, Price Participation Risk, Distributions Risk, Net Asset Value Erosion from Distributions Risk, Return of Capital Risk, Call Option Strategy Risk, Passive Investment and Index Performance Risk, Market Risk, Concentration Risk, as well as risks related to exposure to investments in the underlying company. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund. The use of options contracts involves investment strategies and risks different from those associated with ordinary portfolio securities transactions. The prices of options are volatile and are influenced by, among other things, actual and anticipated changes in the value of the underlying instrument, including the anticipated volatility, which are affected by fiscal and monetary policies and by national and international political, changes in the actual or implied volatility or the reference asset, the time remaining until the expiration of the option contract and economic events. The value of the options contracts is substantially influenced by the value of the underlying stock.