Lightly leveraged ETFs at 125%

by , 12th February 2018

USA

“Lightly leveraged” at 1.25X

Leveraged ETF specialist Direxion Investments is listing four new “lightly leveraged” ETFs in New York under a new sub-brand called “Portfolio+”. The Portfolio+ line will provide 125% of the daily performance of their benchmarks. The new ETFs are:

  • Portfolio+ Developed Markets ETF    PPDM
  • Portfolio+ S&P® Mid Cap ETF           PPMC
  • Portfolio+ Total Bond Market ETF      PPTB
  • Portfolio+ Emerging Markets ETF      PPEM

PPMC seeks to give 1.25X exposure the daily performance of the S&P Mid Cap 400 Index, the prospectus says. It uses swaps and futures to achieve the leverage, while holding anything – from equities, to money market funds, to debts to other ETFs – to achieve its exposure. (In practice it is likely to use other ETFs, complemented with a swap). The other three funds will do something similar but with different indexes.

PPEM will give 1.25X the daily performance of the FTSE Emerging Index.

PPDM will give 1.25X the daily performance of the FTSE Developed All Cap ex US Index, which tracks large-, mid- and small-sized companies in developed markets, excluding the US.

PPTB will give 1.25X the daily performance of the Bloomberg Barclays US Aggregate Bond Index.

According to the prospectus, there are two more Portfolio+ ETFs in the pipeline. One focussed on real estate, the other on 20+ year US Treasuries.

Analysis – a great gateway drug

Leveraged ETFs have plenty of critics. When Direxion rolled out its S&P 500 125% ETF (LLSP), the first of its kind, the popular investment website Seeking Alpha panned it. “It has severe liquidity problems…Since inception, its beta is 0.88 (should be 1.25)… Avoid LLSP at all costs. If you want 1.25x leverage, simply combine a higher leverage ETF, such as SPXL, with cash,” a contributor said.

But there is logic in Direxion’s listing a “lightly leveraged” ETF at 125%. It provides bullish investors who may be sceptical of leveraged products a chance to dip their toes in calmer waters before trying out rollercoaster 3x leveraged products. If for only this reason, the 125% products fit neatly in Direxion’s product suite.

As an aside, one also wonders just how many increments of leverage will be commercially viable. We now have 125%, 150%, 200%, 300% – as well as negative increments. One imagines this will have to stop somewhere.

London

First Trust lists USD version of its AlphaDEX Japan product

First Trust is listing a US dollar-denominated version of its Japan AlphaDEX product, the First Trust Japan AlphaDEX UCITS ETF (FJPU). As with the GBP version, FJPU will track the NASDAQ AlphaDEX Japan Index. First Trust’s AlphaDEX line uses a fundamental weighted approach to try and outperform market weighted benchmarks. They also come at higher fees. (For discussion see here).

London and Germany

State Street lists currency hedged versions of its bond ETFs

State Street is expanding the currency options for its SPDR Bloomberg Barclays Global Aggregate Bond UCITS ETF, providing ETFs that track the same index but with EUR, USD and GBP hedging (GLAU, GLAB; SPFU, SPFB, SPFE).

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