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Are Direxion Leveraged & Inverse ETFs Right for You?

September 01, 2021

Perhaps, if you are a sophisticated and aggressive investor with:

Traders welcome.
  • The willingness to accept substantial losses in short periods of time
  • An understanding of the unique nature and performance characteristics of funds which seek leveraged daily investment results
  • The time and attention to manage your positions frequently to respond to changing market conditions and fund performance.

Definitely not if you are a conservative investor who:

  • Cannot tolerate substantial or even complete losses in short periods of time
  • Is unfamiliar with the unique nature and performance characteristics of funds which seek leveraged daily investment results
  • Is unable to manage your portfolio actively and make changes as market conditions and fund performance dictate.

Direxion Daily Exchange-Traded Funds (ETFs) are leveraged funds that provide powerful leverage and the ability for investors to navigate changing markets with bull and bear flexibility. For example, Direxion Daily 3X ETFs are designed to seek daily investment results, before fees and expenses, of 300% of the daily performance for a Bull fund (or 300% of the inverse of the performance, in the case of a Bear fund) of the benchmark index that they track. There is no guarantee that the funds will achieve their investment objective. All investors should read the Prospectus before investing.

Leveraged and Inverse ETFs FAQ

Q. If the target index is up 10% for a month, shouldn't I expect to have a 30% gain in my Direxion Bull 3X ETF?

A. No, not typically. For example, the investment objective of a Direxion Daily 3X ETF is to seek investment results of 300% (or -300%), before fees and expenses, of the daily performance of its benchmark index. This is a daily objective, and does not apply to longer periods of time. The actual longer-term performance may be close to the daily targets of 300% (or -300%)—but depending on certain market movements and due to the portfolio adjustments required to pursue the daily investment targets set by the fund, performance over time may vary. This will, in some cases, be to the advantage of the shareholder and other times, it will be to their disadvantage.

In markets predominantly trending in one direction with low volatility, the performance for periods longer than a single day may exceed the return of the index, multiplied by the target beta of the portfolio. However, in volatile markets, the pursuit of daily investment targets will typically have a negative impact on the performance for periods longer than a single day.

Q. How can the Bull and Bear Fund that track the same benchmark index both have a negative return for the same given period?

A. Direxion Daily ETFs seek daily investment results. As described in the question above, over longer periods of time, especially when markets experience significant market volatility, investment results can vary. The path of the benchmark index during these longer periods may be at least as important to the fund's return as the cumulative return of the benchmark for the period. As a result, even though the benchmark index had a positive return, a bull fund that tracks it can have a negative return, due to the product of the daily events that take place during the period.

Q. What happens if the value of the index that a Direxion Leveraged ETF is tracking moves more than 33% in one day?

A. If a Fund’s underlying index moves more than 30% on a given trading day in a direction adverse to the Fund, the Fund’s value would go to zero. The Funds’ investment adviser, Rafferty Asset Management, LLC, will attempt to position each Fund’s portfolio to ensure that a Fund does not gain or lose more than 90% of its net asset value on a given trading day. As a consequence, a Fund’s portfolio should not be responsive to underlying index movements beyond 30% on a given trading day, whether that movement is favorable or adverse to the Fund. For example, if a Bull Fund’s underlying index was to gain 35% on a given trading day, that Fund should be limited to a gain of 90% for that day, which corresponds to 300% of an underlying index gain of 30%, rather than 300% of an underlying index gain of 35%.

It is important to understand that an investor in Direxion ETFs cannot lose an amount greater than their initial investment.

Q. Are Direxion Shares ETFs appropriate for buy and hold investing?

 A. No, this is not recommended. Leveraged ETFs seek daily investment results and should therefore be considered primarily for short-term trading purposes. It may, however, be appropriate to hold the funds for periods longer than a single day depending on the performance path of the fund's underlying benchmark index and the investor's risk tolerance. Investors who choose to hold leveraged ETFs for periods longer than a single day should recognize that their holding period is not in line with the fund's investment objective and such investors should regularly monitor and adjust their position to maintain a level of exposure consistent with their investment objective.

Q. The target benchmark index for the Direxion ETF in which I invested was up 3% yesterday, but if I compare the fund's closing price from two days ago to yesterday's close, I only see a gain of approximately 7.5%. Shouldn't this return be closer to 9%? (This is a hypothetical example and investors return may not replicate this example.)

A. Ordinarily, yes. But when we see this type of daily performance discrepancy, it is commonly due to the fund trading at an abnormally large price premium (as compared to the fund's NAV) at the time of the market close. This is usually caused by a higher demand for shares than are currently available in the market. That is, there are more interested buyers than there are sellers of shares in the market at that time. The result is a temporary inflation of the market price for the fund. This means that those investors who bought shares at this premium paid more than the actual net asset value per share; or more than the actual value of the underlying holdings per share in the fund. The disadvantage of buying at a premium is that the investor will essentially be "selling" a portion of the fund's returns to the buyer. This is the reason for the difference in the expected daily returns that can sometimes be seen.

The good news is that this situation is typically resolved relatively quickly. Historically, we've often seen that, as new shares are introduced to the market, supply and demand come back into relative balance and the price premiums ordinarily decline.

ETF shares trade on the open market throughout the day on securities exchanges (the NYSC ARCA in the case of Direxion ETFs). Direxion does not have any control over how they trade—whether at a premium or a discount. As mentioned above, at times when supply is lower than demand, the shares can trade at significant premiums. We do recommend that when investors are considering a trade in any ETF, they check to see if the shares are trading at excessively large premiums or discounts, and consider the impact of this on their investment.

Q. What are the trading spreads?

A. Trading spreads, or the bid ask spread, is the difference between the best price a buyer is willing to pay for a security (bid) and the best price a seller is willing to sell that same security (ask). The bid ask spread depends greatly on the liquidity of the asset. If it is a heavily traded security the spread will tend to be very narrow (i.e.1 or 2 pennies), which cuts back on transaction fees. Less liquid or more thinly traded securities will have wider spreads.

Daily reset. Daily decision.

Q. I purchased a Direxion Daily 3X ETF after the market opened and didn't get an exact 3X return, why?

A.  Intra-day, the total exposure of a Fund may be higher or lower than the stated daily objective depending on the movement of the target index away from its value at the end of the prior trading day.

After a move in the index that is favorable to the fund - either up for a bull fund or down for a bear fund - total exposure will decline below the daily stated objective. Conversely, if the value of the index moves in a direction that is unfavorable to the fund - either down for a bull fund or up for a bear fund - total exposure would rise above the stated daily investment objective. This occurs because, although the net asset levels of the fund and the total exposure to the index move directionally together, the rate in which they move is disproportionate as a result of leverage.

On days when market fluctuation is minimal, the intra-day changes to exposure levels are small. However, on days when there is substantial fluctuation in the value of the benchmark index, the intra-day changes to exposure levels could be greater. Direxion Daily ETFs are intended to be used as short-term trading vehicles.

Q. I am an Investment Advisor or Registered Representative, how do I contact Direxion?

A. Financial professionals can contact the Direxion Sales Desk at 866.476.7523.

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