Direxion is a strong name in the leveraged and inverse ETF world. While many of its most popular bull-and-bear leveraged funds target domestic indexes, the issuer has a handful of offerings in the foreign market as well and seeks to dish out some more with its newest products.
Its latest offerings – both leveraged and inverse forms – came for the developed European market. The products hit the market on January 22 and seek to offer investors high volatility picks in this key area (read: Europe ETF investing 101).
New Direxion Funds
The pair of newly launched Europe ETFs employs triple leverage. The duo look to give investors daily resetting exposure to the FTSE Developed Europe index, with the Direxion Daily FTSE Europe Bull 3x Shares ETF - EURL using 300% exposure, and the Direxion Daily FTSE Europe Bear 3x Shares ETF - EURZ delivering a -300% return (also read Understanding Leveraged ETFs). Both new ETFs look to charge investors 95 basis points a year for this exposure.
As per the fact sheet offered by the index on December 31, 2013, the index follows an equal-weight approach. No single stock occupies more than 2.7%.
Top 10 holdings equal less than one-fifth of the total thus calling for low concentration risk. Sector-wise, banks take up about 13.46% of allocation closely chased by healthcare (10.9%) and the industrial services sector (10.52%).
As of December 31, 2013, the FTSE Developed Europe Index comprises nearly 497 companies with market capitalization between $236.78 billion and $344 million and total annual return of about 26.2%.
The underlying index gives investors exposure to 17 countries — Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. Within this pack, the U.K. accounts for one-third of the total allocation followed by France and Germany with around equal exposure of 14%.
How Do These Fit in a Portfolio?
Due to the daily resetting nature of these leveraged ETFs, the duo is not likely to meet the needs of long-term investors. Instead, investors seeking a short-term bet on the developed European stock market should tap these two products (read: Ride Europe Higher with This Top Ranked ETF).
The European market is on a roller-coaster ride at present. The economy came out of the six-quarter long recession in the second quarter of 2013 and is showing continued signs of recovery. However, the recovery is not symmetrical across nations and the region is still not out of the woods.
Last month, a blow also came to the region’s all-important credit rating when Standard & Poor’s lowered the long-term debt rating of the European Union (EU) by one notch to AA+. The move came after the S&P downgraded the Netherlands to AA+ in November 2013 (read: European ETFs in Focus on Standard and Poor's Downgrade).
While our vote is for the bull product EURL as the developed Europe will arguably be the winner this year, investors can also gain out off the bear product EURZ on any bad news in short time frames.
The European equities space is actually overcrowded with regular ETFs like Vanguard FTSE Europe ETF (VGK), iShares MSCI EMU Index Fund (EZU) and SPDR DJ EURO STOXX 50 ETF (FEZ) while options are still lesser in the leveraged form.
With all the regular Europe funds returning at least 20% in the last one year, there are definitely reasons to bet on this rebounding market through some leveraged exposure.
The newly launched EURL will face competition from ProShares Ultra Europe ETF (UPV) delivering twice the exposure of the same index and charging 95 bps in fees. However, the fund – launched in 2010 – so far has a poor asset base of $28.3 million. The product gained about 44% in last one year.
There is another product in the leveraged Europe space – Barclays ETN+ FI Enhanced Europe 50 ETN (FEEU) – which is seeking to match the performance of the STOXX Europe 50 USD Gross Return index. Making its debut last May, FEEU has $1.06 billion in assets.
The product is very cheap with only 0.29% in expenses. Thus, it will give the pricey EURL a tough time for making money. EURL has to sell its triple leverage strategy – which is a unique one – to remain competitive in the space.
For the inverse products, UltraShort MSCI Europe ETF (EPV) can be tagged as a competitor of EURZ. The fund has an asset base of $33.5 million and lost about 40% in the last one year (as of January 23, 2014). While EPV offers twice the inverse return of the index, EURZ is a -3x option (read: ProShares Switches Indexes for Two Europe ETFs).
So although European investments are quite popular, many in the leveraged and inverse space haven’t really caught on for this market. Given this, it could hard for the duo to build assets, but if Europe remains volatile, these funds may catch on with active traders looking for quick moves in one of the world’s most important economic regions.
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