Direxion "technically" made some exchange-traded fund history on Wednesday.
The company launched a suite of 10 new funds -- three of which bring some unique exposure to investors and one of which will be a true test to see if first mover advantage is still a thing in ETF-land.
It's true, however, that Direxion wasn't the first to go to market with single-name leveraged ETFs in the U.S. Competitor AXS launched the first single-name leveraged products in July. While Nike (NKE) , Pfizer (PFE) and PayPal (PYPL) were interesting underlying securities, the real buzz came from the AXS 1.25x NVDA Bear Daily Nvidia ETF (NVDS) and AXS TSLA Bear Daily ETF (TSLQ) .
Similarly, the first slate of Direxion products were 1X bear and 1.5x bull exposures to Apple (AAPL) with (APPD) and (APPU) and Tesla (TSLA) , with (TSLL) and (TSLS) . Even looking at pre-market trading, the only AXS product trading is TSLQ (TSLA Bear 1x) and while there are some trades coming across in the Direxion Microsoft (MSFT) and TSLA funds, TSLL (TSLA Bull 1.5x) has posted almost 32,000 shares, while the total shares traded in the other three amount to just over 1,700. TSLQ also saw 10,000 shares cross pre-market while NVDS saw 430 shares trade and no other AXS products saw action ahead of the open.
Seeing as all the action on these products is in the TSLA variants, I'll keep my discussion to those.
A Rose By Any Other Name?
Because this can get a little tricky, I'll put it out simply:
- TSLQ is a 1x Inverse TSLA fund.
- TSLS is also a 1x inverse TSLA fund.
- TSLL is a 1.5x leveraged fund.
I've talked about how the only differentiator between competing single-name ETFs with the same exposure profile would be price. Depending on your point of view, price comparisons can come in two forms, expense ratio and the share price of the fund itself. On the expense ratio front, Direxion has an advantage not just in its subsidized price of 97-basis points as compared to AXS' 115-basis points, but also in Direxion's unsubsidized fee of 99-basis points as compared to AXS' 157. (Remember, an expense ratio of 97-basis points would mean a shareholder with $1,000 invested for a calendar year would pay $9.70 in fees over that period.) This makes sense as these swap-based structures are Direxion's bread and butter, and it has established relationships with swap providers going back approaching two decades. The other price comparison that many investors make is the share price of an investment and this is not lost on ETF issuers. Again, the advantage (if I could call it that, because fractional share trading should make this irrelevant) goes to Direxion with its products trading at a 25 handle as compared to AXS' TSLQ trading just over $40 a share.
Path Dependency 101
I've written before about daily reset swap-based ETFs and how their returns can differ over time as compared to the exposure they provide to the underlying. Every leveraged ETF prospectus (TSLS prospectus is here, on page 3) has a full explanation of this phenomenon complete with written descriptions and colorful tables. Essentially, each day's return starts with a new investment so that whatever you gained or lost today is collected and put in a new one-day swap for tomorrow. This can become problematic in times of volatility.
Say I own shares of TSLA at $100 and, after a bad Tweet day from Elon Musk, it declines 20% to $80. The next day, the shares rebound back to $100 and I'm back at even. Let's break these days down using a daily swap. On day one, I have made 20%, my end of day balance is $120 and my swap is reset (the entire $120 is invested in the swap) for the next trading day. On the second day, the name recovers and posts a 25% gain, which translates into the same percentage loss, meaning my $120 just took a 25% haircut, leaving me with roughly $96. Had I shorted the name, I'd be whole by the end of the second day, but because the swap resets every day, that entire capital pool is impacted by daily moves.
While this is a theoretical situation, we can look at the price history of the AXS funds launched in July and see this in action.
Source: Factset, All You Can ETF
As you can see, some names come quite close to simply applying the leverage factor to the period return, but there are some significant differences even in this relatively short time period.
Wrap It Up
As I've said before, the investment product industry styles itself as a provider of solutions as well as a provider of products that let investors "express their opinion" on the markets and now, individual securities. Single name ETFs have potential as a product type, even beyond applying leverage to individual stocks, like trading around earnings or other events.
The only caveat I would offer is that investors and traders alike understand the mechanics of how these products work so that they have a better understanding of what kinds of outcomes they can expect when trading the funds. One source that is useful can be found here. Again, if you have an opinion you want to express about any of these underlying securities then these funds from Direxion and AXS are worth a closer look.
