Market Overview

Direxion Is Accelerating The Shifts Of 10 ETFs From 3x Leverage To 2x Leverage As Volatility Remains High


Direxion is dramatically altering the time frame for shifting 10 of its geared exchange traded funds to double from triple leverage, saying that those changes will go into effect after the close of U.S. markets on March 31 after originally being slated to be implemented on May 19.

Citing an unprecedented spike in market volatility at the hands of the COVID-19 pandemic, Direxion said last week it planned to reduce the daily leverage exposure on 10 well-known ETFs, including the Direxion Daily Gold Miners Index Bull 3X Shares (NYSE: NUGT) and the Direxion Daily Gold Miners Index Bear 3X Shares (NYSE: DUST), to 2x from 3x.

“Effective after market close on March 31, 2020 each Fund’s investment objective and strategy will change to seek daily leveraged, or daily inverse leveraged, investment results, before fees and expenses, of 200% or -200%, as applicable,” said the issuer in a statement released Friday after the market close. That timeline has now been moved up substantially after the firm received expedited approval from the SEC.

Other Funds Affected

In addition to the aforementioned NUGT and DUST, which are two of the most heavily traded leveraged ETFs in the U.S., the small-cap counterparts – Direxion Daily Junior Gold Miners Index Bull 3X Shares (NYSE: JNUG) and the Direxion Daily Junior Gold Miners Index Bear 3X Shares (NYSE JDST) are also being reduced to double leverage.

Today, JNUG traded with 260% leverage instead of the usual 300%.

At a time of increased duress in the oil patch, Direxion will ratchet the Direxion Daily Energy Bull 3X Shares (NYSE: ERX) and the Direxion Daily Energy Bear 3X Shares (NYSE: ERY) down to 2x status. The same treatment is being applied to the ultra-volatile Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares (NYSE: GUSH) and the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares (NYSE: DRIP).

The Direxion Daily MSCI Brazil Bull 3X Shares (NYSE: BRZU) and the Direxion Daily Russia Bull 3X Shares (NYSE: RUSL) are the other affected funds. All 10 products will see “3X” dropped from their names with “2X” moving in.

Wild Moves

At a times of elevated volatility, leveraged ETFs can deliver extreme moves in rapid fashion, testing uninitiated traders' appetite for risk. For example, both the bullish JNUG and bearish JDST are saddled with losses this month to the tune of an average drop of 85.5%.

Geared ETFs use derivatives to obtain leverage, but that leverage isn't obtained on a dollar for dollar basis. Rather, if a geared fund has $100 million in assets, it must maintain $300 million worth of exposure to the index it tracks.

In volatile markets, the need for daily rebalancing can hinder outcomes because a levered fund may increase exposure to an index in advance of a large decline and an inverse leveraged ETF can reduce exposure in advance of big rally.


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