Direxion Funds, which is best known for triple-leveraged exchange-traded products like Direxion Daily Financial Bull 3X Shares ( FAS) and Direxion Daily Financial Bear 3X ( FAZ), has added to its lineup. Caveat emptor. The Direxion Daily China Bull 3X Shares ( CZM), Direxion Daily China Bear 3X Shares ( CZI), Direxion Daily Latin America Bull 3X Shares ( LBJ) and Direxion Daily Latin America Bear 3X Shares ( LHB) triple-leveraged (either bullish or bearish, depending on the fund) exposure to the popular emerging-market fund universe. The CZM and CZI will track the BNY China Select ADR Index and the LBJ and LHB will track the S&P Latin America 40 Index. This is not the first time that the company has taken a stab at the emerging markets. Currently, the Daily Emerging Markets Bull 3X Shares ( EDC) and the Daily Emerging Markets Bear 3X Shares ( EDZ) allow investors leveraged exposure to the broad MSCI Emerging Market Index. However, the new instruments will be the firm's most concentrated to date, with the China tools being its first single nation-focused international funds. The launch of the four new triple-leveraged funds capitalizes on the influx of assets into emerging markets, as investors search for ever-larger yields and returns. Their launch also comes on the heels of Direxion's filings for triple S&P 500 and semiconductor funds, which will track the S&P 500 and Philadelphia Stock Exchange Semiconductor Sector Index and will carry 0.75% expense ratios.
While Direxion will not be the first ETF issuer to traverse this terrain, the leverage the company proposes to offer in these areas is unprecedented. Currently, the ProShares UltraShort S&P500 ( SDS) and the ProShares Ultra S&P 500 ( SSO) are the only available instruments that provide investors with double-leveraged exposure to the S&P 500. The new Direxion funds will up the ante with triple leverage. The release of these new funds will test the memory of investors as well as the warnings issued by Financial Industry Regulatory Authority (FINRA) earlier this year. The new influx of triple-leveraged funds call to mind the risks associated with leveraged offerings and the persistence of FINRA's warnings about leveraged offerings. The new triple-leveraged S&P 500 funds, in particular, call to mind the infamous case of Direxion's Daily Financial Bull 3X ( FAS) and Daily Financial Bear 3X ( FAZ) funds, which had to execute a reverse splits earlier this year due to price erosion. Since the triple-leveraged funds offered by Direxion track their objectives on a daily basis, they can compound volatility, and that can wear the funds down over time. It's important for investors to understand this before they get into these funds. While leveraged ETFs can be powerful tools for sophisticated traders looking to hedge their intraday exposure, they can be dangerous in the hands of investors who don't understand their structure.
Several brokerage firms stopped offering leveraged funds to clients during the summer of 2009, saying the funds were inappropriate for long-term investors. More recently, FINRA ramped up margin requirements for owners of leveraged ETF funds. Recent data from the National Stock Exchange suggests that generally the investors who are using leveraged funds are the short-term traders that the funds are targeted at. Notational trading volume, a measure of how often a fund is bought and sold, suggests that leveraged funds are generally turned over on a daily basis or more frequently. We hope that will be the case with the new Direxion triple-leveraged funds. Investors with long-term objectives should look elsewhere.