UPDATE: Direxion Funds To Seek Monthly, Not Daily, Returns
September 30 2009 - 3:03PM
Dow Jones News
After months of criticism, some mutual funds that magnify
investors' bets on the direction of the stock market are being
scaled back.
On Wednesday, Direxion Funds said its so-called "leveraged"
mutual funds will double investors' bets on the direction of the
stock market on a monthly - rather than a daily - basis.
The change will apply only to Direxion's conventional mutual
funds and not to its exchange-traded funds that, along with those
from Bethesda, Md.-based ProShares ETFs, have provoked the most
controversy.
Leveraged mutual funds and ETFs, which have collected billions
of dollars in the past few years, use complex investments like
swaps and futures contracts to give investors a more convenient
alternative to moves like trading stocks on margin or short
selling.
For example, on a day when the stock market rises 1%, a
triple-leveraged long fund might rise 3%, while a leveraged short
fund would fall 3%.
While such tools appeal to a wide range of investors, many use
them to make bets that last longer than a single day. In that case,
results can be disappointing, especially in volatile markets when
compounding daily returns tend to work against fund investors.
For instance, while the Russell 2000 was up about 2.6% over the
first six months of the year, the effect of daily compounding meant
the Direxion Daily Small Cap 3X Bull ETF was not up 7.8%, but down
about 21% during that span.
Funds that aim for monthly rather than daily returns could still
produce similar discrepancies, but the longer time frame would give
investors more time to react.
Andy O'Rourke, head of marketing at Direxion, says the funds'
new goal may be a "better fit" for investment managers using
leveraged mutual funds to hedge other bets or get exposure to a
certain slice of the market over the medium term. Day traders may
continue to favor the ETFs.
-By Ian Salisbury, Dow Jones Newswires; 212-416-2241;
ian.salisbury@dowjones.com